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Matthias Knab, Opalesque:

Mark Rzepczynski, CIO AMPHI Research and Trading, writes on Harvest Exchange:

A key issue with asset allocation and risk parity is the changes in volatility across asset classes. The foundation for risk parity is based on equal weighing of asset classes volatility as opposed to setting dollar weighting. Hence, knowing the relative differences in volatility and how they move through time is critical. We can describe some of the key issues associated with any volatility matching or equalization strategy by taking at a quick look at the CBOE VIX index for equity volatility and the TYVIX for Treasury bond volatility. The simple case of comparing these two major assets classes helps to describe the problem of volatility matching.

A quick comparison of the two option based volatility indices shows significant differences. Equity volatility has always been higher than bond volatility, but the changes through time can be dramatic.

The volatility of volatility for equities is significantly higher than bonds. Now there are differences in measurement, (change versus relative change), but by just looking at the absolute changes through time, you can see that equity volatility is more prone to spikes and these spikes do not occur at the same time as bond spikes. If both indices move higher, the equi......................

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