OFR stress → World stocks

Common explanation (Ripple · opposite direction): When financial stress and volatility jump, funds that control risk by volatility lower their stock holdings at the same time, putting pressure on stock markets.

This issue: OFR stress at 36 (cool), World stocks at 72 (warm) — OFR stress below normal, World stocks above normal, in line with the common explanation (this is an inverse link).

Hot and cold describe position, not good or bad: warm does not mean a fall is coming, and an extreme reading does not mean a quick reversal. We describe history only, with no buy or sell advice.

Where it stands now

Where the two indicators stand this issue

OFR stress: Now −2.09. World stocks: Positions of 20 national stock markets, weighted by market value 72.

Tests

Does this link hold up?

Common explanationWhen financial stress and volatility jump, funds that control risk by volatility lower their stock holdings at the same time, putting pressure on stock marketsSource: European Central Bank, “Volatility-targeting strategies and the market sell-off” (2020).
Tested against our dataAgreement between the positions of OFR stress and World stocks (same month), measured in the direction of the common explanation: +0.50 (an opposite-direction link: the raw correlation is −0.50, and a negative correlation fits, so the sign is flipped). Looking at every 5-year period (shifted one year at a time), the two moved in that direction in all 12, but that does not mean they always will; data start only in 2009. Supported by the data
Periods when it did not holdAcross 12 5-year periods, out of step in none.

History

The two lines, overlaid

Data: Office of Financial Research (OFR), US Department of the Treasury; Positions of OECD national share price indices, weighted by World Bank market capitalization (calculated by this site). Positions: our calculation.

OFR stressWorld stocks

Time lag

At what lag do they match best?

Longer bar = moves more in the direction of the common explanation (the number is the agreement).

same month+0.50
3-month lag+0.38
6-month lag+0.32
9-month lag+0.22
12-month lag+0.06
18-month lag−0.13

Limits

What this card cannot tell you

Moving together does not prove that one causes the other.
Links change over time; periods when this one did not hold are listed in full.
This is the historical record, not a forecast.

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