Yet as coronavirus cases climb across the U.S. and economic data signal continued weakness, the threat of extreme price moves is clear. A metric that tracks just how volatile implied stock swings are, the volatility of volatility, is still one quarter higher than the decade average.

The post-crisis era has already seen five market blow-ups as measured by kurtosis, which calculates how often extreme moves are occurring relative to normal, or so-called fat tails. That compares with typically just one in a decade between the 1920s and 2008, according to Bowler’s calculations. In credit and equities, the metric reached at least three times its previous peaks this year in the pandemic crash.

A recent example: On June 11, the S&P 500 plunged 5.9% amid signs of a second wave of the coronavirus in America. In terms of how sharp the move was relative to what volatility trends were projecting, that was the 25th biggest shock out of roughly 23,000 trading days since the 1920s, according to Bowler’s analysis.

One problem is that high-frequency traders have filled the void left by investment banks after regulations made it harder for the latter to facilitate trading. As a result, liquidity -- or the ability to find buyers and sellers at a tight spread -- tends to vanish quickly during sell-offs.

“Liquidity conditions haven’t quite come back to normal, especially in equities,” said Sandrine Ungari, head of cross-asset quantitative research at SocGen. “Any spike in risk aversion is most probably going to trigger a lot of volatility.”

Hysterical markets are posing particular challenges for systematic strategies. Ones that target volatility have struggled to cut positioning fast enough during drawdowns and then catch up with the rally. Trend followers with a medium-term view may also find fewer winning trades in cross-asset trading that zigzags rapidly.

At Mellon Investment, Roberto Croce says it’s never been more important to adjust positions based on fast-moving measures of risk -- like three-day realized variance, a measure of stock deviations relative to the mean -- even if it means selling into a down market.

“Risk seems pretty low and then it’s not -- it seems to jump a lot faster than it used to,” said the manager who oversees risk-parity and managed-futures funds.

This article was provided by Bloomberg News.

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