Reader Questions Answered

What’s going on with volatility?

Yesterday Michael Covel posted a reader question on his blog:

“As i am going through my different portfolios i am wondering what’s up with Eurodollar, seems to have extremely low volatility, much lower than another futures. Any idea whats going on?”

Covel, of course, is a big proponent of trend trading, having written Trend Following and also The Complete Turtle Trader, which is a look at the Turtles, who were very much trend traders. As a result, his fairly predictable response was “Who cares?”.

My own response to Covel would be that volatility was specifically included in the Turtle system, so it definitely matters. To the extent that someone could anticipate changes in volatility they can better manage risk.

Going beyond that, though, is simple market reality. I don’t know whether the person asking the question was referring to Eurodollars or EUR/USD (the Eurodollar term is sometimes wrongly used to refer to the currency exchange rate when it’s supposed to refer to US dollars on deposit outside the US). It doesn’t really matter, though. As my comparative volatility analysis shows, on a relative volatility scale, those two markets are low readings. So the answer to the question above is “That’s almost always the case”.

To address things from a fundamental view, if the questioner is indeed talking about Eurodollars, then it’s simple. US interest rate policy has been very stable for quite some time now (ZIRP), so there’s been no reason for short-maturity fixed income markets to show much volatility.