2018 - 4 - 16 - GS On Vol

PORTFOLIO STRATEGY RESEARCH | April 16, 2018 | 11:20PM BST
GLOBAL STRATEGY PAPER NO. 28
A taste of the high (vol) life

Drivers and asset allocation implications of changing volatility regimes
Christian Mueller-Glissmann,
CFA
+44 20 7774-1714
christian.mueller-glissmann@gs.com
Goldman Sachs International
Alessio Rizzi
+44 20 7552-3976
alessio.rizzi@gs.com
For the exclusive use of ERASSKAZOVA@POLYGONINV.COM
Goldman Sachs International
Ian Wright
+44 20 7774-2600
• The S&P 500 vol spike in February has snapped markets out of the low vol ian.wright@gs.com
regime that dominated 2017. The speed and size of the vol spike has been Goldman Sachs International
extreme, especially as it came from very low levels - it has also been
exacerbated by technical factors. With volatility an important driver of asset
allocation and portfolio risk, the key question is if we have entered a genuinely
new regime and whether high vol will remain. WHAT’S INSIDE
• The S&P 500 has moved through 15 low and 14 high vol regimes in the past Return of risk? 2018 had a
100 years. While we find the macro backdrop tends to condition vol regimes, volatile start after the low vol
regime shifts have often been difficult to pin on macro alone. In addition vol of in 2017 (p.3)
vol has increased since the 90s, resulting in faster regime shifts. We identify
A brief history of vol
macro and market drivers for S&P 500 volatility to assess the probability of
regimes from cyclical
regimes. We find a lower probability of a continued low vol regime, but a
sustained high vol regime still appears unlikely based on current macro and drivers to structural shifts
market indicators. (p.9)
Probable cause potential
• Low vol regimes tend to be 'risk on' and carry-friendly, which usually means
macro and market drivers of
rising valuations across assets. The opposite is true in high vol regimes,
vol regimes (p.17)
somewhat unsurprisingly. Higher volatility means lower risk-adjusted returns,
both for equities and for multi-asset portfolios broadly. From the low to the high
(vol) life asset allocation
• High vol regimes can also result in 'buying the dip' being a less good strategy,
implications (p.23)
as drawdowns can last longer and be deeper. With rising volatility, somewhat
counter-intuitively, option selling strategies have performed better: we find that
call overwriting and put writing is more attractive outside low vol regimes.
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registered/qualified as research analysts with FINRA in the U.S. This report is intended for distribution
to GS institutional clients only.
The Goldman Sachs Group, Inc.
Goldman Sachs GOAL - Global Strategy Paper
Summary
n The S&P 500 vol spike in February has snapped markets out of the low vol
regime that dominated 2017. The speed and size of the vol spike has been
extreme, especially coming from very low levels - it has most likely been
exacerbated by technical factors. Also, the contagion to volatility across assets has
been limited. Since 1928 there have been 34 cases when vol has spiked more 20%
(10 cases with a peak below 30%) - those usually normalise in 2-3 months. With
volatility an important driver of asset allocation and portfolio risk, the key question is
if we have entered a genuinely new regime and whether high vol will remain.
n The S&P 500 has moved through 15 low and 14 high vol regimes in the past
100 years. While we find the macro backdrop tends to condition vol regimes, regime
shifts have often been difficult to pin on macro alone. Especially since the Great
Moderation, vol has often disconnected and led macro, in part due to the unwind of
financial imbalances. We find the predictive power of current volatility for the
future, the vol clustering effect, has become less strong as vol of vol has picked
up since the 1990s. Also, longer periods of low volatility increase risk of higher
volatility in the medium term as they can result in financial and market imbalances.
n We identify macro and market drivers for S&P 500 volatility to assess the probability
of shifts between regimes. We find that the probability of a continued low vol
regime has declined but a sustained high vol regime still appears unlikely. That
said, anticipating vol regime shifts has been difficult and vol often leads the
indicators we identified. Low vol regimes can be more easily forecast, as these
might be more related to the macro, whereas high vol regimes may, at least initially,
be less linked to fundamentals. High vol regimes regularly come with extremes in
the indicators. The probability of being in a low vol regime is often highest when
indicators are favourable – but not at extremes, as that could signal a turning point.
n Low vol regimes tend to be ‘risk on’ and carry-friendly, which usually means
rising valuations across assets. The opposite is true in high vol regimes,
somewhat unsurprisingly. S&P 500 risk-adjusted returns tend to be highest during
low vol regimes and the same was true in 2017, when the S&P 500 had a 12m return
/ volatility ratio of 4.2x. Similarly for multi-asset portfolios, changing vol regimes are
important as equity/bond correlations have been more positive; in addition, high S&P
500 volatility often coincides with high volatility across assets.
n As volatility increases, so does the probability of larger moves, in both directions.
This also means that ‘buying the dip’ tends to be a less good strategy at those
times, as drawdowns can last longer and be deeper. That said, large vol spikes
can increase the medium-term asymmetry of equity returns. With rising volatility,
somewhat counter-intuitively, option selling strategies have performed better: we
find that call overwriting and put writing is more attractive outside low vol regimes.
Many thanks to Peter Oppenheimer, Sharon Bell, Kathy Matsui and Rocky Fishman for
their helpful comments. For our index options research and more details on the VIX,
covered by Rocky Fishman, see here.
16 April 2018 2
Return of risk? 2018 had a volatile start after the low vol in 2017
A volatile start to 2018, led by higher equity volatility

For most of 2017 S&P 500 volatility was very low, both relative to its history and relative
to other equity markets. A long-term perspective reveals that S&P 500 1-month realised
volatility was close to 100-year lows, despite perceived high political and policy
uncertainty. As we wrote in the middle of last year, such ‘boring’ markets can last a long
time; they are more common than investors think and have been closely linked to
‘Goldilocks’ periods, with accelerating growth and anchored inflation (see GOAL - Global
Strategy Paper: The upside of boring, June 20, 2017).
Now, after more than 19 months of very low equity volatility globally, the equity
drawdown that started at the end of January has been followed by more lasting
high volatility. The shift to higher vol was initially triggered by higher rates vol (see
GOAL Post: ‘Tis the season to be vol-ly, October 13, 2017) and the unwind of short VIX
ETFs. But recently it has moved into a broader worries, including a global growth
slowdown, monetary policy uncertainty, ‘trade wars’ and headwinds for the US tech
sector. While the recent S&P 500 realised vol spike is well below those seen during the
Global Financial Crisis and when the Tech Bubble burst, it has been close to some of the
larger vol spikes in the last 100 years, similar to the 2015/16 EM/oil crisis. Also, the VIX
had a large spike to levels close to those during the Asian Financial Crisis in 1998 and
the invasion of Kuwait in 1990 (Exhibit 1).
Exhibit 1: The vol spike in February was comparable to some of the larger ones in the last 100 years
S&P 500 1-month volatility history (since 1928) and VIX (since 1990)
90 Great VIX S&P 500 1-month realised Black Global Financial

Depression Monday Crisis
Tech
80 bubble
Industrial Eisenhower burst US debt
production recession Escalation Invasion downgrade
70 Start of Cold War & Euro area
plunge of Kuwait LTCM/
WW II Cold Iran oil crisis
War John F. Vietnam Russian
begins production Crisis EM/ oil
60 Kennedy war & cut May
assassinated monetary flash crisis
Post war Suez
inventory Crisis tightening Volcker crash
50
crisis Cuban First Oil monetary Asian
Missile tightening financial 9/11
price
40 Crisis shock crisis
30
20
10
0
28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research
During the ensuing global equity drawdown, volatility across assets increased as
well, although equity volatility picked up most. During the low vol regime, equity
volatility was particularly low compared with history and with other assets. Now, several
weeks after the initial spike, S&P 500 1-month volatility remains well above the lows
from 2017. US equity volatility had the largest spike out of the different equity markets,
and in the recent volatility normalisation S&P 500 volatility has lagged, with non-US
16 April 2018 3
volatility declining much faster (Exhibit 2 and 3). In part this is due to the continued
volatility in the US tech sector, which has a large weight in the S&P 500. Also, volatility
across assets has settled again at below average levels (Exhibit 4).
Exhibit 2: While equity vol was particularly low during the low vol Exhibit 3: Volatility has increased most for the S&P 500, which was
regime, it also rebounded most also particularly low compared with history
Percentile of 1-month realised volatility across assets (since 1970) Percentile of 1-month realised volatility across equity markets (since
1970)
100% Equity 100% S&P 500

Bond MSCI Europe
90% 90%
FX TOPIX
80% Commodity 80% MSCI EM
Credit
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18
Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research
Exhibit 4: Recent volatility has been mostly an equity story - volatility across assets has settled again, while S&P 500 remains elevated
1-month realised volatility (daily changes)
Equities Bonds Credit Commodities FX
1-month
Volatility S&P MSCI MSCI German Japan DJ
TOPIX US 10Y US 30Y US HY Gold Oil GSCI EUR JPY GBP
500 Europe EM 10Y 10Y Credit
Data since: Jan-28 Dec-71 May-49 Jan-70 Jan-62 Feb-77 Mar-77 Jul-86 Jan-16 Jan-90 Dec-68 Jan-83 Dec-69 Aug-71 Sep-71 Aug-71
Current: 23.0 13.7 18.3 13.5 4.8 10.6 2.9 1.2 3.7 2.1 13.4 26.5 15.9 6.1 6.7 6.2
1m Change: 8.1 1.4 0.6 -1.6 -0.4 -0.7 -0.9 0.0 0.2 -1.2 2.1 2.8 1.8 -1.1 -2.8 -0.6
Percentile: 86% 69% 75% 53% 33% 45% 16% 3% 69% 48% 47% 38% 51% 21% 22% 24%
Since 1990: 87% 54% 55% 49% 14% 42% 7% 3% 38% 48% 54% 32% 40% 12% 14% 19%
Average: 15.4 12.9 14.9 14.8 6.3 12.0 4.8 4.3 3.3 3.0 16.9 33.8 17.2 8.9 9.7 8.7
Median: 12.4 10.4 12.9 13.1 5.9 11.0 4.4 3.8 2.5 2.2 14.0 30.0 15.6 8.6 9.1 8.2
75th: 17.7 15.3 18.4 17.3 7.8 14.3 5.9 5.2 4.3 3.5 19.9 40.6 21.1 11.0 11.9 10.4
25th: 9.2 7.8 9.0 10.1 4.2 8.9 3.4 2.6 1.5 1.5 10.0 21.6 11.2 6.5 7.0 6.3
Max: 103.8 78.3 102.7 97.1 23.9 35.3 15.6 17.8 23.2 25.0 105.4 160.2 73.8 27.9 34.8 35.7
Min: 2.6 3.6 2.8 3.4 0.5 1.8 0.6 0.8 0.4 0.1 0.6 2.1 4.4 0.7 1.2 0.3
Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research
S&P 500 vol spike was large but the peak level was low relative to history
Nevertheless, compared with historical S&P 500 1-month vol spikes above 20%, the
peak level was relatively low (Exhibit 5). There have been 34 instances when S&P 500
1-month vol spiked about 20% since 1928: the average peak was around 40%. Usually a
S&P 500 vol spike normalises within 3 months, often even faster, towards an average
level of 15%, whereas so far S&P 500 1-month realised vol is tracking at the lower end
of historical levels after a large vol increase.
That said, it was unusual to have such a large vol spike originate from such low
levels of volatility: realised S&P 500 1-month vol spiked from levels close to 5% in
Q4 2017 to more than 25%. On average, vol spikes above 20% have historically come
from levels above 10%: of the 34 vol spikes above 20%, only four came from levels
below 10%, which were during the low vol regimes of the 1950s and 1960s. But this vol
spike has come from the lowest levels ever. We think this is to a large extent due to
technical factors, as we discuss in the grey box below.
16 April 2018 4
Exhibit 5: S&P 500 vol spike is large compared to history but the peak is relatively low
S&P 500 1-month realised volatility around volatility spikes above 20 (34 instances since 1928)
45 25th/75th Percentile
Average
40 Current
35
30
25
20
15
10
-9m -6m -3m +3m +6m +9m

0
1 year before Vol spike 1 year after
Source: Bloomberg, Goldman Sachs Global Investment Research
Looking at S&P 500 vol spikes above 20% but below 30%, similar to this one, confirms
it is unusual to have such a large vol spike from such low vol levels of volatility; i.e., the
normalisation of vol after the spike tracks history closely. Based on history after a vol
spike above 20% but below 30%, S&P 500 vol should settle after 2-3 months at an
average level around 10%. This suggests that S&P 500 vol should continue to decline
from here, although clearly this also depends on many other factors (Exhibit 6).
The correction around the vol spike was small compared with history but faster
(Exhibit 7). It was roughly in line with corrections during spikes below 30% and with
historical bull market corrections. Drawdowns within bull markets of 10% or more (but
less than 20%) are not uncommon (we find 22 since 1945): the average correction is
13% and lasts four months (with the recovery also lasting four months). With the
continued correction, the S&P 500 is tracking slightly below the ‘normal’ recovery.
Exhibit 6: But the vol spike has come from much lower levels than Exhibit 7: S&P 500 is tracking slightly below the ‘normal’ recovery
historically would be the case Based on 34 vol spikes above 20% for the S&P 500 since 1928
S&P 500 1-month realised volatility around vol spikes above 20 but with
a peak below 30 (10 instances since 1928)
30 25th/75th Percentile 115

Average
Current 110
25
105
20
100
15
95
10
90
Average
Average for spikes below 30
5 Average for bull market corrections
85
Current
-9m -6m -3m +3m +6m +9m -9m -6m -3m +3m +6m +9m
0 80
1 year before Vol spike 1 year after 1 year before Vol spike 1 year after
Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research
16 April 2018 5
VIX fallout and technical factors have likely exacerbated the vol spike
The S&P 500 vol spike and drawdown have likely been exacerbated by the VIX fallout. The VIX spike in
February was one of the largest on record and was exacerbated by technical factors (Exhibit 8, see Global
Markets Daily: A Technical Sell-off, February 6, 2018). Positioning in short vol strategies was large at the
beginning of the year. VIX futures positioning was very short and our Options team highlighted aggregate
net short vega position across VIX ETPs at the beginning of the year (see VIX Positioning: VIX ETPs Are
Now Net Short Vega - Should We Worry?, January 11, 2018).
As our Options team pointed out, there was considerable evidence of distress vol buying from those
ETPs. If some of the investors selling VIX futures to ETP issuers simultaneously sold S&P 500 futures as a
hedge against the market risk inherent in their short VIX future positions, their positioning could potentially
have weighed on equities and increased realised vol.
Exhibit 8: Compared with history, the VIX spike has been large and from unusually low levels
Historical VIX spikes above 20 (19 instances since 1990)
Average
Current
35
30
25
20
15
10
-9m -6m -3m +3m +6m +9m

5
1 year before VIX spike 1 year after
Source: Datastream, Goldman Sachs Global Investment Research
The VIX had the largest 1-day move in history, jumping from 17.31 to 37.32, a move of 20 VIX points. It was
larger than during the Lehman failure in October 2008 or on September 11, 2011 (Exhibit 9). It has only
increased >50% on four other occasions (8/8/2011, 2/27/2007, 11/15/1991, 7/23/1990). That said, the
drawdown was smaller compared with the VIX spike based on the historical spot/vol relationship (Exhibit
10).
Owing to the unwind of short VIX strategies, the spike has been larger and faster but the same has been
true for the normalisation: the VIX declined sharply in the days after, alongside realised volatility, before
picking up again more recently. But the recent increase is unlikely to be driven by the same VIX ETP
trading dynamics, as the AuM in those strategies is lower and the level of the VIX is still elevated (see VIX:
Q&A on the Trading Dynamics of ETPs, February 7, 2018).
Besides the VIX fallout, other technical factors have likely driven higher vol of vol during the recent vol
spike (see GOAL Post: Correction dissection - drivers and implications of the equity drawdown, February 7,
2018). It is likely the equity drawdown has also been exacerbated by a reversal of bullish positioning from
investors via upside calls, CTAs, vol target and risk parity funds after a strong, low vol Q4 2017.
16 April 2018 6
Exhibit 9: February 8, 2018 saw the largest 1-day VIX move in Exhibit 10: The VIX spike was much larger than the move in
history the S&P 500 would imply
25 Lehman US rating 25 R† = 0.62

bankruptcy downgrade Brexit February 2018
October 2008
20 20
September 11,
2001 CNY 15
15 August 2011
devaluation
Daily change in VIX

10 10
5
5
0
0
-5
-5
-10
-10
-15
-15 VIX 1-day moves
February 5, 2018 -20
-20 -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12%
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Daily S&P 500 return
Source: Datastream, Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research
Higher portfolio risk YTD with little diversification across assets

The S&P 500 vol spike has snapped markets out of the low vol regime that
dominated 2017. Long periods of low volatility can increase risks of higher equity
volatility in the medium term as they might boost risk appetite from proyclical investors.
Very low volatility usually signals stable or improving macro conditions which are
supporting risk appetite. Of course, such a backdrop also attracts systematic, procyclical
investors such as vol target funds, CTAs and risk parity investors, and encourages them
to use leverage, short vol strategies and take illiquidity risk. On the flipside, breaking out
of the low vol cluster might have contributed to the ongoing fragility and higher vol more
recently as risk appetite from investors has waned due to concerns over a new vol
regime with higher levels of volatility.
With the shift towards higher equity volatility, portfolio risk as a whole has also
increased due to positive equity/bond correlations and bonds not being good
hedges during the equity drawdown. We have highlighted this risk before: the ‘bull
market in everything’ has resulted in a valuation frustration, with bonds, equities and
credit somewhat expensive at the same time, limiting potential for diversification (Global
Strategy Paper: The Balanced Bear Part 1: Low(er) returns and latent drawdown risk,
November 28, 2017). In Q1, the classic ‘safe havens’, which usually outperform when
the VIX spikes, have not provided protection during the recent sell-off (Exhibit 11, GOAL
Kickstart: Is anything “safe” anymore?, March 12, 2018).
16 April 2018 7
This has also increased concerns about the ‘central bank put’, which has
historically helped buffer volatility. Central banks appear less able or willing to ease,
with inflation likely to move higher and because they may feel that imbalances and
excesses are starting to build. In addition, current easing options are more limited for
central banks as rates are still low and QE purchases have only just been reduced. While
in the recent period of volatility global bond yields have declined to YTD lows, the scope
for further decline may be more limited. With equity volatility the key driver of portfolio
risk, investors could be forced to reduce risk further in case of continued high equity
volatility.
Exhibit 11: In the last correction, no assets were positively correlated with VIX
Correlation with VIX (weekly changes)
0.3
Correlation with VIX since 1990
Correlation with VIX in Q1 2018
0.1
-0.1
-0.3
-0.5
-0.7
-0.9
S&P 500
GSCI
JPY
TOPIX
Gold
DJ Credit
Oil
US HY
EUR
Japan 10Y
MSCI EM
GBP
Germany 10Y
US 10Y
US 30Y
MSCI Europe
Source: Datastream, Haver Analytics, Goldman Sachs Global Investment Research
16 April 2018 8
A brief history of vol regimes — from cyclical drivers to structural shifts
S&P 500 volatility tends to be countercyclical but there are other drivers
Volatility tends to be countercyclical: as the cycle matures, inflation tends to pick
up and recession risk increases, both of which can drive increased volatility (see
also Options Research: Equity volatility and the business cycle, May 20, 2009). Of
course, recessions usually result in bear markets, during which volatility tends to be
higher. However, volatility tends to lead the macro and markets can be more volatile for
longer than macro. Since 1929, equity volatility has tended to increase before
recessions: when growth starts to slow down there is usually a shift to a higher vol
regime, especially since the 1990s (Exhibit 12). Volatility tends to fall as the second
derivative, or macro momentum, turns positive even if business activity is still
contracting. However, the recent vol spike has happened without a US recession or S&P
500 bear market.
Not every vol spike is driven by the US business cycle or macro risks. There have
been several periods when S&P 500 volatility shifted higher without a US recession or
even without a bear market. Examples include corrections such as ‘Black Monday’ in
1987, when volatility spiked primarily due to technical factors. Also, with economies and
markets becoming more global, correlations across equity markets (and assets) have
increased and, as a result, the global macro backdrop can also drive S&P 500 volatility
(see Global Strategy Paper: Correlation Dislocation; Drivers and & Implications, June 28,
2012); for example, S&P 500 volatility increased sharply in the the late 1990s around the
Asian Financial Crisis and Russian Default, coupled with the collapse of LTCM and the
EM/oil crisis of 2015-16.
Exhibit 12: S&P 500 volatility usually spikes around recessions and during bear markets, but not only at such times
S&P 500 1-month volatility (blue shading = bear market, orange shading = US recession, grey shading = both). Dashed lines represent 25/75th
percentile.
70
60
50
40
30
20
10
0
28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: NBER, Bloomberg, Goldman Sachs Global Investment Research
16 April 2018 9
Switching gears - markets regularly switch between vol regimes...

Temporary vol spikes can always happen, even in low vol regimes. However, if
volatility does not decline but is settling at higher levels it signals a new vol
regime. Markets have regularly moved through different vol regimes in the past 100
years (Exhibit 13). We define high and low vol regimes as those periods during which
S&P 500 volatility has clustered for prolonged periods of time (at least six months) in
the bottom (<10%) and top (>18%) quartile based on history since 1928. The start and
end are defined as the point when 1-month volatility drops below 10% / increases above
18% for the first time, and when it increases above 10% / falls below 18% respectively
(and 6-month volatility follows).
Exhibit 13: The past 100 years have been roughly split equally between high, low and normal vol regimes
S&P 500 realised volatility history (green shading = low vol regime, orange shading = high vol regime)
70
60
50
40
30
20
10
0
28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
1-month 6-month 75th percentile 25th percentile
Source: Bloomberg, Goldman Sachs Global Investment Research.
...although their characteristics have varied in the last 100 years

Including the most recent one, there have been 15 low vol regimes and 14 high vol
regimes since 1928 (see Appendix 1 for an overview and comparison of the periods).
The average length of a low vol regime has been 22 months (median 16 months) and
the average length of a high vol regime has been 25 months (median 11 months).
However, high and low vol regimes have differed materially in the last 100 years. We
subdivide further into three distinct periods (Exhibit 14):
1. From 1928 up to and including World War II, which was generally very volatile due
to the Great Depression and WW2. As a result, S&P 500 volatility was above the
long-term average of 15% for more than a decade, and there were mostly high vol
regimes.
2. 1950-90, which had frequent and prolonged low vol regimes, supported by the
‘Golden’ 1950s and the Bretton Woods agreement anchoring FX and rate volatility.
Outside of the stagflation periods of the 1970s, there were few high vol regimes:
most of this time saw volatility of between 10% and 18%. And, of course, there
was ‘Black Monday’ in 1987, which resulted in an extreme high vol regime.
16 April 2018 10
3. Since 1990, with the ‘Great Moderation’, both low and high vol regimes seem to
have become longer (the average length has been more than two years) and to
some extent more extreme, with higher vol spikes. Also, there has been less time
spent in neither high or low vol regimes since the 1990s.
Exhibit 14: S&P 500 high and low vol regimes have changed over the last 100 years
Time Length S&P 500 1-month volatility S&P 500 6-month volatility
Period Regime spent (months) Average Median 75th 25th Max Min Average Median 75th 25th Max Min
Low vol (<10%) 30% 22 9.0 8.7 10.5 7.2 20 2.6 9.7 9.6 10.7 8.5 18 4.9
1928-2018 Neither 38% 14 12.5 12.2 14.5 10.0 32 3.2 13.0 12.7 14.8 11.3 30 4.8
High vol (>18%) 33% 25 24.4 20.6 28.4 16.1 108 6.2 25.0 21.1 27.2 17.7 59 7.2
Overall 15.3 12.4 17.6 9.2 108 2.6 15.9 13.1 18.1 10.2 59 4.8
Low vol (<10%) 8% 13 9.1 9.0 10.4 7.7 14 5.2 9.9 9.5 11.0 8.9 13 7.9
1928-1950 Neither 29% 14 15.3 12.4 14.3 10.5 29 6.8 13.6 13.7 15.0 11.9 18 8.9
High vol (>18%) 63% 41 26.9 22.9 33.4 16.5 108 6.2 28.1 24.7 34.4 18.2 59 10.8
Overall 21.4 16.5 25.9 12.0 108 5.2 22.5 17.9 26.8 14.0 59 7.9
Low vol (<10%) 36% 19 8.4 8.3 9.9 6.9 16 2.6 9.2 9.3 10.1 8.1 18 4.9
1950-1990 Neither 52% 17 12.3 11.9 14.4 9.6 32 3.2 12.5 12.3 14.5 10.9 22 4.8
High vol (>18%) 12% 11 20.8 18.3 23.6 14.4 100 6.9 21.3 18.6 22.2 16.2 46 7.2
Overall 11.9 10.7 13.8 8.2 100 2.6 12.4 11.4 14.4 9.3 46 4.8
Low vol (<10%) 38% 32 9.7 9.5 11.3 7.6 20 3.5 10.2 10.2 11.5 9.0 18 6.4
1990-2018 Neither 24% 9 12.9 12.8 15.2 10.4 27 5.0 14.0 12.9 15.4 11.8 30 7.0
High vol (>18%) 38% 26 22.8 20.2 25.6 16.6 90 7.1 22.6 20.5 24.3 18.0 58 10.9
Overall 15.5 13.2 18.4 9.7 90 3.5 15.9 13.3 19.6 10.7 58 6.4
With the ‘Great Moderation’ since the mid-1980s, macro volatility and inflation
have trended down. Inflation has been a key ingredient for a recession since WW2 as it
leads to central bank tightening (see US Economics Analyst: The Next Recession:
Lessons from History, June 23, 2017); the lack of inflation has allowed central banks to
err on the side of caution and buffer the business cycle. This saw the advent of the
‘central bank put’ since the 1990s, which has driven generally negative equity/bond
correlations during ‘risk off’ episodes and thus has helped buffer market shocks as well.
As a result, expansions have become longer and, with them, so have low vol
regimes (Exhibit 15 and 16).
Exhibit 15: Since the Great Moderation there has been more Exhibit 16: Since the 1990s, both high and low vol regimes have
volatility during expansions been longer
Length of expansion phases and months spent in different vol regimes Length of S&P 500 vol regimes (dark blue = high vol, light blue = low vol)
140 Months in high vol regime 100
Months in low vol regime 90

120 Neither
80
100 70
60
80
50
60
40
40 30
20
20
10
0 0
1927 1933 1938 1945 1949 1954 1958 1961 1970 1975 1980 1982 1991 2001 2009 28 37 43 46 48 49 50 51 53 58 62 63 66 70 71 73 77 82 85 87 90 92 97 03 07 11 12 15 16
Source: NBER, Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research
The longest expansion was in the 90s, when the S&P 500 increased for nearly a
decade without major setbacks, driven by a combination of strong earnings growth,
falling bond yields and low inflation. Also, as a result of lower inflation risk, real bond
16 April 2018 11
yields have trended down, which has contributed to low volatility by boosting the search
for yield, supporting asset valuations and reducing pressure to deleverage. They have
also boosted US share buybacks since then, which helped buffer equity volatility.
But this has also driven concerns about the so-called ‘volatility paradox’, which
suggests that prolonged periods of low volatility can result in excessive
risk-taking and releveraging, which then increases the latent risks on a longer horizon.
Indeed, at the same time, high vol regimes have become longer and more volatile since
recessions have often been accompanied by an unwind of financial and market
imbalances that have built up previously (see US Economics Analyst: Monitoring Macro
Risk from Financial Excess in the US Economy, March 11, 2018).
Thus, although equity volatility has been lower on average when it is low (<15%)
since the 1990s, it has been higher when high (>15%), such as during the Tech
Bubble burst and the GFC (Exhibit 17). Indeed, it has been a while since the US had a
post-WW2 textbook recession, in which overheating led to high inflation, in turn leading
the Fed to tighten; as Fed Chair Powell noted earlier this year: “More recently, with
inflation under control, overheating has shown up in the form of financial excess”. The
two low vol regimes since the GFC, 2012-14 and 2016-18, were interrupted by external
shocks (the Euro area crisis and the EM/oil crisis) - this might have helped prevent a
build up of large imbalances during this cycle.
The average S&P 500 1-month volatility during expansions still tends to be much lower
than during recessions, and the same is true during bull markets relative to bear markets
(Exhibit 18). Similarly, the proportion of time spent with S&P 500 1-month vol below
10% is unsurprisingly lower in recessions than in expansions. The difference in volatility
has varied: up to and including WW2, the gap was very large. It narrowed for the
1950-90 periods, supported by Bretton Woods, and it has increased again since 1990.
The time spent with S&P 500 volatility above 18% during expansions or bull
markets has also increased since the 1990s, suggesting markets have become
more volatile due to reasons other than the macro.
Exhibit 17: When vol is high, it is higher on average since the 1990s Exhibit 18: Gap between vol in ‘good’ and ‘bad’ macro phases has
Comparison of 10-year average of S&P 500 1-month volatility widened since the 1990s
S&P 500 1-month volatility
33 10-year average of S&P 500 1-month volatility Average Median 75th 25th Vol >18% Vol <10%
...when below 15% 1928-50
30
...when above 15% Expansions 17.9 14.9 20.9 11.5 36% 14%
27 Recessions 29.5 25.8 39.2 14.3 67% 7%
Difference -11.6 -10.9 -18.3 -2.8 -30% 7%
24 Bull markets 19.8 14.7 22.4 10.8 38% 19%
Bear market 23.3 19.0 29.8 13.3 54% 5%
21 Difference -3.5 -4.3 -7.4 -2.5 -16% 14%
18
1950-90
Expansions 11.3 10.3 13.1 8.0 7% 46%
15 Recessions 14.7 13.4 18.2 9.5 26% 27%
Difference -3.4 -3.0 -5.1 -1.6 -19% 19%
12 Bull markets 11.5 10.5 13.4 7.9 10% 45%
Bear market 13.5 11.5 14.9 9.1 12% 34%
9 Difference -2.0 -1.1 -1.5 -1.1 -2% 12%
6 1990-2018
38 43 48 53 58 63 68 73 78 83 88 93 98 03 08 13 18 Expansions 14.0 12.2 16.8 9.4 21% 31%
Recessions 27.3 22.1 30.5 17.7 72% 0%
Difference -13.3 -9.8 -13.7 -8.3 -51% 31%
Bull markets 13.5 11.8 16.2 9.2 18% 33%
Bear market 25.1 21.5 28.7 16.5 66% 1%
Difference -11.6 -9.7 -12.4 -7.3 -48% 32%
Source: Bloomberg, Goldman Sachs Global Investment Research Source: NBER, Bloomberg, Goldman Sachs Global Investment Research
16 April 2018 12
Need for speed - vol of vol suggests risk of larger and faster vol spikes
S&P 500 vol spikes and have in recent years become both larger and faster. As we
highlighted before, vol of vol has generally increased since the Great Moderation (see
also Global Strategy Paper: The upside of boring, June 21, 2017) – already after the ‘flash
crash’ in May 2010, parallels were drawn to ‘Black Monday’ in 1987. Since then, and
again more recently, there have been several days with sharp equity declines and high
intraday volatility. Exhibit 19 shows that the 10-year average volatility of S&P 500
1-month volatility has increased since the 2000s. The 5-year vol of vol has increased
even more recently, indicating that this is not skewed by the GFC. With higher vol of vol,
the risk of volatility overshooting relative to fundamentals has increased.
The increase in vol of vol likely also reflects changes in the market microstructure:
(1) changes in bank regulation such as Dodd-Frank and the Volcker rule, which have
reduced liquidity across assets (see Top of Mind: A Look at Liquidity, August 2, 2015); (2)
the rise of systematic investing, e.g., passive/smart beta strategies that reduce liquidity
can drive crowding; (3) CTAs, risk parity and volatility target funds, that often invest very
procyclically; (4) levered or liquidity-constrained exchange-traded products, e.g, on high

yield credit or commodities; and (5) short vol carry strategies, e.g. short VIX ETPs. As a
result, we think there is an increased risk that volatility starts to disconnect again from
fundamentals due to the decline in liquidity across markets (see Global Markets Daily:
Post-VIX postscript: Is Liquidity the New Leverage?, March 19, 2018).
Exhibit 19: Vol of vol has trended up since the GFC

Volatility of S&P 500 1-month volatility (daily)
180% 1-year
5-year
170%
10-year
160%
150%
140%
130%
120%
110%
100%
90%
80%
70%
38 43 48 53 58 63 68 73 78 83 88 93 98 03 08 13 18
Low vol cluster is broken - signals from volatility are more mixed
Volatility tends to cluster – if volatility is very low, it has on average stayed low in
the subsequent 12 months, limiting risks for investors somewhat (Exhibit 20). The
recent low vol regime has come to an end (the grey box below provides a short review
of this). The end of a low vol cluster is inevitable and, similarly, very long periods of high
vol are unlikely. With an increasing time horizon (>1 year), the signal from current levels
16 April 2018 13
for future volatility weakens; for example, on a 5-year horizon volatility tends to pick up
from low levels and maximum drawdowns become larger.
Also, the vol clustering effect has somewhat weakened since the 1990s: the
predictive power of current S&P 500 1-month volatility for next months has declined
(Exhibit 21). Similarly, the predictive power of current volatility for the next 12 months
has declined compared with the last 100 years (Exhibit 22). We think this reflects to
some extent the rising vol of vol since the mid-1980s, which drives faster regime shifts
and can also drive large changes in volatility that are less linked to slower-moving
fundamentals and more driven by markets. As a result volatility forecasting models that
are based on history, e.g. GARCH models, may be less likely to work well.
Exhibit 20: Volatility tends to linger at extremes in the near term - current levels provide little signal
Percentile Level Average S&P 500 volatility in the subsequent...
From to From to 1 month 3 months 6 months 12 months 2 years 5 years
0% 10% 2.5 7.3 7.9 8.7 8.9 9.3 9.8 10.5
10% 20% 7.3 8.7 9.7 10.3 10.7 11.1 12.3 13.1
20% 30% 8.7 10.0 10.5 11.5 12.1 12.2 12.9 14.1
30% 40% 10.0 11.2 11.4 12.2 12.7 12.8 13.1 14.2
40% 50% 11.2 12.6 12.5 13.3 14.0 13.9 14.4 15.1
50% 60% 12.6 14.2 13.7 14.3 14.7 15.2 15.6 15.3
60% 70% 14.2 16.4 14.8 15.6 16.0 16.8 17.2 16.5
70% 80% 16.4 20.0 17.4 17.5 17.8 18.5 18.2 17.2
80% 90% 20.0 27.3 21.3 22.0 21.9 22.1 21.8 20.1
90% 100% 27.3 106.7 34.6 32.7 31.7 30.2 28.1 23.9
Average since 1928: 15.4 15.9 16.1 16.4 16.7 16.9
From current levels of S&P 500 1-month volatility, several high volatility episodes
have followed in the subsequent 12 months. This suggests that the signal from
volatility alone is increasingly limited and there is a wider range of possible outcomes.
As a result, with less anchored vol, risk appetite is less well supported as the
distribution of risks is shifting less favourable. High volatility episodes often persist as
equity drawdowns tend to be clustered in time, as investors need time to adjust their
portfolios to a potential new, higher vol regime.
Exhibit 21: In the short term, very low volatility tends to increase Exhibit 22: Shorter-dated volatility has less predictive power for
the likelihood of vol staying low the medium term and the relationship has weakened since the
1990s
120% 80%
R† since 1928 = 0.76 R† since 1928 = 0.42
Subsequent S&P 500 12-month volatility
R† since 1990 = 0.15

Subsequent S&P 500 1-month volatility
R† since 1990 = 0.54

70%
100%
60%
80%
50%
60% 40%
30%
40%
20%
20%
10%
0% 0%
0% 20% 40% 60% 80% 100% 120% 0% 20% 40% 60% 80% 100% 120%
S&P 500 1-month volatility S&P 500 1-month volatility
16 April 2018 14
All good things must come to an end — a review of the recent low vol regime
The recent low vol regime started in mid-2016 and lasted roughly 19 months until February 2018. As
discussed in Global Strategy Paper: The upside of boring, long periods of low vol (where the S&P 500
volatility is below 10% for more than six months) have not been uncommon; we identified 15 low vol
periods since 1928, which lasted on average 22 months. This one was shorter compared with those since
the 1990s and those in the 1960s, which often lasted in excess of two years. But in terms of average
levels of volatility, it has been one of the least volatile – only the regime in 1963-65 was less volatile.
Exhibit 23: Average volatility was particularly low, also close to levels in the 1960s
Distribution of S&P 500 3-month volatility during low vol regimes (duration in brackets)
18
25th/75th Percentile Average
16
14
12
10
2
43-45 49-50 51-53 53-54 58-62 63-65 66-69 70-71 71-72 77-78 85 92-96 03-07 12-14 16-18
(15m) (11m) (16m) (15m) (45m) (17m) (31m) (9m) (7m) (21m) (11m) (43m) (41m) (25m) (19m)
Indeed, the recent regime resulted in one of the longest periods of S&P 500 1-month volatility below its
long-term average of 15%, comparable to the late 1990s. But more extreme has been the number of days
spent in the bottom quartile (below 10%), which peaked at 185 days and has only been surpassed in the
1960s (Exhibit 24). This low vol regime was also extreme in another way: the S&P 500 had the longest
period since 1929 without a correction of more than 5%, at 404 days (beating the 1992-96 low vol regime
by 5 days). But it also resulted in the longest period without a 3% S&P 500 correction (311 days).
Exhibit 24: One of the longest number of consecutive days Exhibit 25: During the recent low vol regime the S&P 500 had
with low, below-average volatility its longest period without a 5% correction
Consecutive days of S&P 500 1m vol below 25th/50th percentile Consecutive days without a S&P 500 correction
450 450
400 400
350 350
300 300
250 250
200 200
150 150
100 100
50 50
0 0
28 33 38 43 48 53 58 63 68 73 78 83 88 93 98 03 08 13 18 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 01 05 09 13 17
Days below 50th percentile (13%) Days below 25th percentile (10%) Days since last 5% correction Days since last 3% correction
16 April 2018 15
Benchmarking the current episode to historical ends of low vol regimes shows a larger and
faster-than-normal pick-up of realised vol, illustrating higher vol of vol compared with history. The initial
normalisation of the vol spike was similarly large and fast. However, what has been unusual is that
volatility picked up again and remained elevated. When the other 14 low vol regimes since 1928 ended,
S&P 500 1-month vol usually settled at 10-12% on average after 2-3 months but very seldom stayed above
the long-term average of 15%, whereas current levels remain well above that (Exhibit 26).
Exhibit 26: Vol spike has been larger than those during historical ends of low vol regimes
S&P 500 1-month volatility during and after a historical low vol regime ends (since 1928)
26 Average
Current
24
22
20
18
16
14
12
10
8
6
4
2
-9m -6m -3m +3m +6m +12m
0
1 year before Low vol regime end 1 year after
Moving out of a low vol period does not have to come with a large correction. Usually, volatility spikes and
equities settle into a higher volatility regime first before large equity corrections, which tend to come 6-24
months later; the average drawdown was less than 5%. The S&P 500 drawdown at the end of the recent
low vol regime was slightly larger than normal, in line with the larger-than-normal vol spike due to higher
vol of vol (Exhibit 27). Contagion across assets has been similar to previous ends of low vol regimes: while
cross-asset volatility has picked up from its lows, it has declined to below-average levels again (Exhibit 28).
Exhibit 27: End of low vol regimes does not mean a bear Exhibit 28: Cross asset vol tends to increase after low vol
market is imminent period end but results are mixed
S&P 500 performance during and after the end of a low vol regime Percentile of 1-month cross-asset volatility ex equity during and
(since 1928) after the end of a low vol regime (since 1970)
120 25th/75th Percentile 70% 25th/75th Percentile

Average Average
115 Current Current
60%
110
105 50%
100
40%
95
90 30%
85
20%
80
-18m -12m -6m +6m +12m +18m -9m -6m -3m +3m +6m +12m
75 10%
1 year before Low vol regime end 1 year after 1 year before Low vol regime end 1 year after
Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research
16 April 2018 16
Probable cause — potential macro and market drivers of vol regimes
Establishing probable cause looking at macro and market drivers of vol

regimes
As volatility tends to lead macro, is driven by sentiment and aggregates lots of
drivers and risks, forecasting volatility and timing regimes is hard. In an attempt to
forecast different volatility regimes, we look at three broad categories of potential
drivers: macro (growth, inflation and monetary policy), macro uncertainty (macro
volatility and policy uncertainty) and markets (financial markets stress). Of course, it is
often a combination of those that conditions a new vol regime. For example, a weaker
growth/inflation mix makes markets more vulnerable to political risk.
To assess the ‘probable cause’ of a vol regime, we looked at a wide range of

indicators in each category that are linked to S&P 500 volatility historically (see
Appendix for an overview and description of these). We narrow these indicators down to
26 based on their correlation with S&P 500 1- and 6-month volatility, and the likelihood
of them being at their extremes in the different regimes (with data since 1990).
Causation via correlation - narrowing down macro and market drivers of volatility
Of course, correlation does not mean causation but it helps narrow down the indicators:
Exhibit 29 shows the highest positive or negative correlation with S&P 500 1- and
6-month vol. For most indicators, the change is more important than the level.
Exhibit 29: Growth and rising valuations tend to be negatively correlated with volatility, while credit
spreads, macro uncertainty and cross-asset vol are positively linked
Correlation with S&P 500 volatility (data since 1990)
US HY Spread
BAA-AAA spread
Rates vol
Cross asset vol
GSCI Vol
Unemp. rate 6m chg
CPI dispersion
GDP revision vol
Inflation revision vol
US HY Spread 12m chg
NFP vol (1y)
T-bill revision vol
GDP dispersion
EPU 12m chg
CPI vol (1y)
MBS credit spread
EPU
TED spread
US 10y-2y 12m chg
T-bills dispersion
Fed funds 12m chg
ISM manufacturing
Shiller PE 12m chg
PCE 6m % chg 6-month
NFP 3m chg 1-month
US CAI 3m avg
-80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Source: Bloomberg, Consensus Economics, Haver Analytics, Goldman Sachs Global Investment Research
16 April 2018 17
Credit spreads tend to have the strongest positive correlation for S&P 500 vol,
closely followed by volatility in other asset classes. Rates volatility is particularly
highly correlated with equity vol. From a macro point of view, the 6-month change in the
US unemployment rate has a strong positive correlation, while the 3-month change in
non-farm payrolls and the level of the US current activity indicator (CAI) have a strong
negative link. We find CPI inflation levels are less important than consensus revisions
and dispersion. Also, unsurprisingly, rising Shiller P/Es tend to come with lower volatility.
Establishing probable cause - assessing the likelihood of high and low vol regimes
To assess what volatility regime we are in, we can also look at the likelihood of those
indicators being at extreme levels (Exhibit 30) – for details of the definition of quintiles,
etc., see again the Appendix. For example, since 1990 in roughly 97% of months
spent in S&P 500 high vol regimes, US HY credit spreads were in the top quintile
(above 698bp) – shifting to Q4 (between 553bp and 698bp) lowers the likelihood of
being in a high vol regime sharply (to 48%).
Wide and widening credit spreads across markets tend to increase the probability of
being in a high vol regime most, while worsening growth momentum, i.e., large
3-month declines in our US CAI and in non-farm payrolls, also increase risk of a higher
vol regime. Low macro uncertainty, a Fed rate hike cycle and low cross-asset volatility
tend to increase the probability of low vol regimes. But, as we discuss in the grey box
below, those probabilities are not always linear and also distributions can change over
time. As a result, the combination of levels and changes of the indicators is
important. Also, for low vol regimes, we find being at moderate levels of those
indicators often lowers the probability of a regime shift to high vol as there is less risk of
a reversal.
Exhibit 30: Wider credit spreads and sharp declines in equity valuations are very likely in high vol regimes, while during low vol regimes
the Fed tends to hike, cross-asset vol is low and the yield curve flattens
Likelihood of a being in high or low vol regime depending on the top/bottom quintile of each variable (data since 1990, dotted line = unconditional
probability)
US HY Spread (Q5) Fed funds 12m chg (Q5)
MBS credit spread (Q5) GSCI Vol (Q1)
Shiller PE 12m chg (Q1) GDP revision vol (Q1)
US HY Spread 12m chg (Q5) Cross asset vol (Q1)
NFP 3m chg (Q1) US 10y-2y 12m chg (Q1)
BAA-AAA spread (Q5) T-bills dispersion (Q1)
US CAI 3m avg (Q1) T-bill revision vol (Q1)
Cross asset vol (Q5) EPU 12m chg (Q1)
NFP vol (1y) (Q5) NFP vol (1y) (Q1)
TED spread (Q5) ISM manufacturing (Q5)
EPU 12m chg (Q5) Unemp. rate 6m chg (Q1)
GDP dispersion (Q5) BAA-AAA spread (Q1)
GDP revision vol (Q5) US HY Spread 12m chg (Q1)
Unemp. rate 6m chg (Q5) US CAI 3m avg (Q5)
ISM manufacturing (Q1) Rates vol (Q1)
CPI dispersion (Q5) US HY Spread (Q1)
GSCI Vol (Q5) GDP dispersion (Q1)
US 10y-2y 12m chg (Q5) CPI vol (1y) (Q1)
T-bill revision vol (Q5) EPU (Q1)
PCE 6m % chg (Q1) CPI dispersion (Q1)
Fed funds 12m chg (Q1) NFP 3m chg (Q5)
Rates vol (Q5) PCE 6m % chg (Q5)
Q1 = bottom quintile (low)
Inflation revision vol (Q5) Inflation revision vol (Q1)
Q5 = top quintile (high)
EPU (Q5) TED spread (Q1)
T-bills dispersion (Q5) Shiller PE 12m chg (Q5) Low vol regime
High vol regime
CPI vol (1y) (Q5) MBS credit spread (Q1)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Bloomberg, Consensus Economics, Haver Analytics, Goldman Sachs Global Investment Research
16 April 2018 18
Problems of ‘probable cause’ of vol regimes and the risk of wrongful conviction
What is extreme now may not necessarily be extreme in the future, as there are regime shifts in the
indicators. For example, rates volatility has declined with the ‘Great Moderation’ and swings in macro
data, such as the ISM, US CAI or non-farm payrolls, have become smaller. An ISM above 57 is currently a
much more positive signal of a strong macro backdrop than it was in the 1960s (Exhibit 31). To avoid
regime shifts in the data, we look at only recent history, i.e., since 1990, and assume a similar distribution
in the future. Also, the relationship of the probability with the indicator can shift: since the 1990s, a high or
low ISM has increased the probability of a low or high vol regime respectively much more (Exhibit 32).
Exhibit 31: A high and rising ISM usually increases the Exhibit 32: Since the 1990s a high ISM made a low vol regime
probability of being in a low vol regime more likely and a low ISM higher vol more likely
ISM manufacturing (green shading = low vol regime, orange Probability based on ISM manufacturing quintiles (data since 1948,
shading = high vol regime) dashed lines since 1990)
75 80% Probability High vol regime
70 Probability Low vol regime

70%
65
60%
60
50%
55
50 40%
45
30%
40
20%
35
10%
30
25 0%
51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 Bottom quintile Q2 Q3 Q4 Top quintile
Also, extreme levels for macro and valuations can also increase the probability of a reversal. Since
1990, in roughly 85% of months spent in high vol regimes, BAA credit spreads were in the top quintile
(Exhibit 33). But if credit spreads are already in the bottom quintile, indicating a strong backdrop right now,
this also increases the risk of a sharp repricing of credit risk. The highest probability of being in a low vol
regime is when credit spreads are in Q2, i.e., not yet very tight (Exhibit 34).
Exhibit 33: During low vol regimes, credit spreads tend to Exhibit 34: Especially since the 1990s, high credit spreads
tighten - very tight levels often indicate risk of a regime shift increased the probability of being in a high vol regime
BAA-AAA spread (green shading = low vol regime, orange Probability based on BAA-AAA spread (data since 1950, dashed
shading = high vol regime) lines since 1990)
350 90% Probability High vol regime

Probability Low vol regime
80%
300
70%
250
60%
200 50%
150 40%
30%
100
20%
50
10%
0 0%
51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 Bottom quintile Q2 Q3 Q4 Top quintile
Source: Bloomberg, Haver, Goldman Sachs Global Investment Research Source: Bloomberg, Haver, Goldman Sachs Global Investment Research
16 April 2018 19
Narrowing down the suspects - a probability model for vol regimes

We estimate the probability of being in different regimes through logit models1,
which helps to narrow down the variables to those with the most predictive power:
n For macro, we use ISM manufacturing (level), the 6-month change in the US
unemployment rate and the 12-month rolling change in the Fed funds rate.
n For macro uncertainty, we use only the 12-month change in economic policy
uncertainty (EPU) and 1-year volatility of GDP consensus revisions; the other
variables, while correlated, did not increase model performance materially.
n Of the market indicators, we use US 10-yr rates vol, S&P GSCI vol, 12-month
changes in US HY credit and US 10y-2y yield as well as TED spreads.
The combined model helps to recognise regimes with probabilities of rising/falling into
them. However, it struggles to anticipate regime shifts, especially if vol of vol is
high. This is particularly the case right now – the model still indicates a continued high
(albeit falling) probability of low vol but a still low probability of high vol (Exhibit 35).
Exhibit 35: The probability of a low vol regime is still high while that of a high vol regime remains low
Probability of different S&P 500 vol regimes (green shading = low vol regime, orange shading = high vol regime,
dotted line = unconditional probability of high and low vol regime)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Average probability S&P 500 low vol regime Average probability of S&P 500 high vol regime
Source: Bloomberg, Datastream, Haver Analytics, Goldman Sachs Global Investment Research
Tracking the probabilities for the individual categories reveals, unsurprisingly, that the
market indicators tend to lead the macro, especially at the onset of high vol regimes,
and have the highest R-squared (Exhibit 36). Also, the model does a better job of
forecasting low vol regimes than high vol regimes, especially with non-market variables.
This suggests the former are more driven by fundamentals while the latter, especially
regime shifts to high vol, are – at least initially – less linked to fundamentals (Exhibit 37).
1
A logit model estimates the relationship of several variables to a binary outcome (i.e., being in a high (low)
vol regime or not). Using model estimates, one can then construct probabilities of the binary outcome
occurring given current variable values. Using all the variables creates several problems: (1) there is a risk of
overfitting, (2) the indicators are very correlated, and (3) the market indicators lead and dominate the macro.
As a result, we run logit models for each category (macro, uncertainty and markets) and within those narrow
the variables down to the most statistically significant which add most to the explanatory power. The overall
probability is the average of the 3 models. We run separate logit models for high and low vol regimes.
16 April 2018 20
Exhibit 36: Macro indicators are starting to signal a lower Exhibit 37: The probability of a high vol regime, especially based
probability of being in a low vol regime on market indicators, remains low
Probability of S&P 500 low vol regime based on different indicators Probability of S&P 500 high vol regime (orange shading = high vol
(green shading = low vol regime, dotted line = unconditional probability, regime, dotted line = unconditional probability, 39%)
38%)
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Macro (R2=26%) Market (R2=40%) Macro Uncertainty (R2=40%) Macro (R2=17%) Market (R2=44%) Uncertainty (R2=26%)
Source: Bloomberg, Datastream, Haver, Goldman Sachs Global Investment Research Source: Bloomberg, Datastream, Haver, Goldman Sachs Global Investment Research
Feeling the heat - but so far little sign of a broad trend towards higher vol
Another approach to track the likelihood of high and low vol regimes is a heatmap. The
advantage of this approach is that it has more breadth as different drivers can lead the
vol regime shifts (Exhibit 38). So far, we still see little reason for a high vol regime:
most indicators are still green, although growth has softened. The same is true for
uncertainty, which is broadly green, with the exception of inflation revision volatility and
economic policy uncertainty (EPU), which have picked up. Of the market variables, since
the 1990s at least, US HY credit spreads and the TED spread have been among the best
predictors of vol regimes – while they widened in Q1 they have stabilised since April.
Exhibit 38: Our heatmap shows the market and macro backdrop during different S&P 500 volatility regimes
Percentile for different indicators (data since 1990)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
S&P 500 volatility
6-month
Combined signals
All
Macro indicators
Macro uncertainty
Market indicators
Macro indicators
ISM (level)
US CAI (3m avg)
PCE (6m % chg)
US unemployment (6m chg)
Non-farm payrolls (3m chg)
Fed funds rate (12m chg)
Macro uncertainty
NFP vol (1y)
Inflation vol (1y)
T-Bill forec. revision vol (1y)
CPI forec. revision vol (1y)
GDP forec. revision vol (1y)
T-Bill dispersion (3m avg)
CPI dispersion (3m avg)
GDP dispersion (3m avg)
EPU index (3m avg)
EPU index (12m change)
Market indicators
BAA-AAA spread (level)
US HY credit spread (level)
US HY spread (12m chg)
TED spread (level)
MBS credit spread (level)
Shiller P/E (12m chg)
Cross-asset vol
US 10-year rates vol
GSCI vol
US yield curve (12m chg)
Source: Bloomberg, Haver Analytics, Datastream, Consensus Economics, Goldman Sachs Global Investment Research
16 April 2018 21
Higher but not high - most indicators still point to lower volatility levels
Based on most of the macro, market and uncertainty indicators, it still appears
somewhat unlikely that we have entered a new persistent high vol regime. That
said, equity volatility has often led the macro, and regime shifts are difficult to predict;
indeed, the same has been true this time. Of course, the recent increase in vol has
likely been exacerbated by technicals. We still think bear market risk remains low and
expect positive equity returns in 2018. Still a similarly low level of S&P 500 vol to
that in 2017 appears unlikely - the macro backdrop has worsened compared with last
year, and macro and policy uncertainty have increased.
The ‘Goldilocks’ backdrop of accelerating global growth with anchored inflation

and easy monetary policy appears less likely from here. S&P 500 volatility tends to
be lowest when growth accelerates (ISM above 50 and rising) and inflation pressures
are limited (Exhibit 39). It tends to pick up during slowdowns and is highest during
contractions (ISM below 50 and falling). Both the ISM and global PMIs have peaked and
there has been a sharp decline in macro surprises globally. In addition, inflation has
picked up, albeit primarily in the US. The pace of slowdown matters from here: in
2004-07, for example, it lasted nearly two years and did not drive a high vol regime.
While growth is softening, it remains healthy and our economists see low recession risk
near term. Also, compared with the past two recessions there is less build-up of
financial imbalances that are at risk of unwinding.
But investors also have to digest higher uncertainty due to (1) volatility in the US
tech sector, in part due to concerns over regulation, (2) rising risk of global ‘trade wars’,
(3) rising uncertainty on the ‘central bank put’, and the ‘beginning of the end of QE’ and
(4) rising geopolitical tensions in the Middle East. In addition, US political uncertainty will
likely rise into mid-term elections, which tends to drive higher volatility. There have also
been signs of worsening liquidity conditions, with LIBOR/OIS spreads widening and
upward pressure on shorter-dated US credit spreads. But, as our Credit team has
highlighted, this is mostly driven by technicals, in contrast to previous liquidity crises,
and is less of a reason for concern. And, while US HY credit spreads have started to
widen and the US yield curve has flattened, levels of both are not yet consistent with
high vol regimes. Still, as market indicators tend to lead regime shifts, a stabilisation of
credit and rates markets is a strong signal for vol to decline.
Exhibit 39: A worsening growth/inflation mix is likely to result in less anchored volatility
Data since 1952 (inflation in line is below 3% and above 1%)
Average S&P 500 1-month volatility Proportion of months with vol below 10% Proportion of months with vol above 18%
ISM manufacturing ISM manufacturing ISM manufacturing
Above 50 Below 50 Above 50 Below 50 Above 50 Below 50
Up Down Down Up Up Down Down Up Up Down Down Up
Down Up
9.9 13.5 NM NM 68% 21% NM NM 8% 21% NM NM

Low
9.7 NM NM NM 55% NM NM NM 0% NM NM NM
Inflation
Down Up
11.1 15.2 18.5 10.8 49% 32% 22% 57% 17% 20% 44% 9%
In-line
11.5 12.2 16.4 12.1 44% 50% 35% 29% 7% 16% 30% 0%
Down Up
13.0 14.7 16.6 NM 57% 24% 14% NM 11% 19% 38% NM

High
11.0 14.4 16.4 13.9 40% 25% 17% 27% 1% 17% 24% 9%
16 April 2018 22
From the low to the high (vol) life — asset allocation implications
The end of ‘boring’ - lower risk-adjusted returns for equities

For asset allocators, the end of the low vol regime points to lower risk-adjusted
returns, especially for equities. At the beginning of 2018 and towards the end of the
recent low vol regime, the 12-month return / volatility ratio for the S&P 500 peaked at
4.2, one of the highest levels in the last 100 years; such high levels are often reached
during low vol regimes, which makes ‘boring’ markets ‘exciting’ for asset allocators
(Exhibit 40). The last time similarly high risk-adjusted returns were reached was in the
mid-1990s, and in the 1960s. During higher vol regimes there is the potential for sharp
recoveries after equity drawdowns but it is still very difficult to generate long periods of
sustained higher risk-adjusted equity returns.
Exhibit 40: High sharpe ratios in low vol regimes makes ‘boring’ markets more ‘exciting’
S&P 500 12-month rolling return/ volatility ratio (green shading = low vol regime, orange shading = high vol regime)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
More risk in multi-asset portfolios, also with bonds less good hedges
Equities are usually the main source of risk in multi-asset portfolios and a shift to
a higher vol regime suggests a more defensive stance. This is particularly the case
for risk parity funds and cross-asset volatility target funds, which increase risk based on
volatility by asset class and on a portfolio level. 2017 was also one of the best years for a
60/40 portfolio since 1962: the return/volatility ratio was 3.6x. Only the recovery years of
1985 and 1995, as well as 1965, were stronger. While the 60/40 return, at 12%, was
only slightly above average, the 60/40 volatility in 2017, at 3.2%, competes with the
lowest volatility years since 1928 (Exhibit 41).
Portfolio risk will be higher also if bonds are less good hedges and there is less
potential for diversification. Since the 1990s bonds have provided a hedge for equities
in periods of higher volatility, allowing multi-asset investors to run higher risk/leverage
levels – equity/bond correlations tend to turn more negative during high vol regimes due
to the ‘central bank put’. But, right now, as both bonds and equities appear expensive,
16 April 2018 23
bonds may be less good hedges for equities in drawdowns (see Global Strategy Paper:
The Balanced Bear Part 1: Low(er) returns and latent drawdown risk, November 28,
2017). Equity/bond correlations have already turned positive at the beginning of the year,
resulting in more volatility for multi-asset portfolios (Exhibit 42).
Exhibit 41: Risk-adjusted performance of multi-asset balanced Exhibit 42: ...and more positive equity/bond correlations might
portfolios is usually closely linked to equity volatility... result in higher risk in multi-asset portfolios
60/40 portfolio (60% S&P 500, 40% US 10-year bond) 12-month rolling US equity/bond correlation (green shading = low vol regime, orange
return/ volatility ratio (green shading = low vol regime, orange shading = shading = high vol regime)
high vol regime)
6.0 1.0
5.0 0.8
0.6
4.0
0.4
3.0
0.2
2.0
0.0
1.0
-0.2
0.0
-0.4
-1.0
-0.6
-2.0 -0.8 3-month

12-month
-3.0 -1.0
63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17
Source: Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research Source: Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research
Volatility across assets tends to follow S&P 500 vol regimes closely
Also, usually if S&P 500 vol is low or high, the same is true across assets:
cross-asset volatility has started to pick up YTD, although it remains below average
(Exhibit 43). Only in the 1980s has there been a large disconnect, where equity volatility
was not particularly high but volatility across assets was in the top quartile. This was
driven in particular by high fixed income volatility due to the monetary tightening by the
Fed in response to the high levels of inflation in the 1970s. But, on average, levels of
volatility are more clearly different to normal levels in high vol regimes: the gap between
normal and low vol regimes is less pronounced (Exhibit 44). Finally, for FX volatility the
gap of levels of volatility between S&P 500 high and low vol regimes is the smallest.
Exhibit 43: Volatility across assets tends to move together Exhibit 44: FX volatility seems least linked to equity volatility
Average cross-asset percentile of 1-month realised volatility (green Average percentile of 1-month realised volatility for different assets
shading = low vol regime, orange shading = high vol regime)
100% 80%
Low vol Neither High vol
90% 70%
80%
60%
70%
50%
60%
40%
50%
30%
40%
30% 20%
20% 10%
10% 0%
Equity Bond FX Commodity Credit Average cross-
0% asset
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: Bloomberg, Haver Analytics, Datastream, Goldman Sachs Global Investment Research Source: Bloomberg, Haver Analytics, Datastream, Goldman Sachs Global Investment Research
16 April 2018 24
Low vol regimes are ‘risk on’ and carry-friendly, high vol are not
Unsurprisingly, low vol periods are generally ‘risk on’ and carry-friendly, with
strong returns in equities and credit and muted performance of safe havens.
Equities are the most sensitive to a change in volatility regime, with much lower returns
in high vol regimes, while bond returns, especially US 30Y, are getting stronger (Exhibit
45). S&P 500 usually outperforms non-US equities during high vol regimes. While US IG
credit total returns tends to benefit from lower bond yields, US HY credit tends to suffer
more from widening credit spreads. Gold tends to benefit from ‘flight to safety’ in
higher vol regimes, as does the Yen.
Exhibit 45: Low vol regimes tend to be positive for risky assets, while high vol regimes are not
Average monthly return during different volatility regimes (total return, data since 1990 where available)
2.0% Equities Bonds Credit Commodities FX
Low Vol
1.5%
Neither
High Vol
1.0%
0.5%
0.0%
-0.5%
-1.0%
S&P 500 MSCI Topix MSCI US US Germany Japan 10Y DJ Corp US HY Gold Oil GSCI EUR JPY GBP
Europe EM 10Y 30Y 10Y (IG)
Source: Datastream, Haver Analytics, Goldman Sachs Global Investment Research
Valuations tend to be negatively correlated to volatility: for both equity and credit,
they tend to increase in low vol and decrease in high vol regimes (Exhibit 46). US HY
credit spreads are very closely linked to levels of volatility (Exhibit 47). However, there
can be strong returns and increases of valuations for risky assets when the regime is
neither low nor high vol, as such periods often include transitions out of bear markets,
when vol can stay elevated for longer but markets are already recovering strongly.
Exhibit 46: Low vol regimes tend to come with rising valuations... Exhibit 47: ...while higher vol coincides with higher risk premia
Average monthly change (data since 1990) US HY credit spread and S&P 500 1-month realised volatility
0.9% 10
2000 US HY credit spread R2 = 0.56 60
0.7% 8
1800 S&P 500 1-month vol (RHS)
0.5% 6
50
1600
4
0.3%
1400
2 40
0.1%
0 1200
-0.1%
-2 1000 30
-0.3%
-4 800
-0.5% Low Vol 20
-6 600
Neither
-0.7% -8 400
High vol
10
-0.9% -10 200
NTM PE Shiller PE BAA-AAA US HY US ERP US 10Y Yield
(% chg) (% chg) (bps, RHS) (bps, RHS) (bps, RHS) (bps, RHS) 0 0
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
Source: I/B/E/S, Shiller, GFD, Goldman Sachs Global Investment Research Source: Bloomberg, Haver, Goldman Sachs Global Investment Research
16 April 2018 25
Chasing your tail risk - more risk of larger moves in high vol regimes
In low vol regimes the distribution of S&P 500 1-month returns is skewed
positively and tails are limited; as we discussed in Global Strategy Paper: The upside
of boring, this also lowers the risk of larger equity drawdowns and thus allows investors
to take more risk in equities. But in high vol regimes the S&P 500 1-month returns are
more negatively skewed compared with low vol regimes, and there are more tails, both
negative and positive (Exhibit 48). Larger tails create more opportunities for market
timing, which requires investors to capture positive, while avoiding negative, tails. Of
course, market timing is very difficult and, when chasing your tail risks, there is always
the risk of just chasing your tail.
Exhibit 48: In low vol regimes the distribution of S&P 500 returns has less tails and a more positive skew
Distribution of S&P 500 1-month returns during different vol regimes (since 1928)
35%
High vol regime
Low vol regime

30%
Neither
25%
20%
15%
10%
5%
0%
below -8% -8% to -6% -6% to -4% -4% to -2% -2% to 0% 0% to 2% 2% to 4% 4% to 6% 6% to 8% above 8%
S&P 500 1-month return
Volatility as a market timing signal for when to buy the dip

Volatility can serve as a market timing signal: large equity drawdowns during vol
spikes create opportunities to ‘buy the dip’. After vol spikes, the asymmetry of
returns in the medium term often improves as markets often overshoot due to sharp
shifts in risk appetite. The S&P 500 12-month return after a large vol spike tends to be
more positive (Exhibit 49). This is particularly true since 1990. Since then, from S&P 500
1-month volatility levels of more than 40% the S&P 500 had mostly positive returns in
the subsequent 12 months. But high volatility also increases the risk of an equity
drawdown lasting longer and becoming larger, especially if the macro backdrop
worsens.
Exhibit 50 shows that the medium-term asymmetry of returns improves with the size of
the vol spike. But, due to vol clustering at high levels, near-term returns tend to remain
very poor after a large vol spike. That said, after vol spikes of more than 20%, the hit
ratio of having positive S&P 500 returns over the subsequent two years is 100%. While
the recent S&P 500 vol spike was large, the peak was relatively low compared with
16 April 2018 26
history; thus, the signal from volatility is not necessarily indicating very good asymmetry
of equity returns yet.
Exhibit 49: Since 1990, from realised vol levels above 40, Exhibit 50: Asymmetry of equity returns improves after a large vol
subsequent 12-month returns have seldom been negative spike
S&P 500 1-month vol and subsequent 12-month returns Average subsequent S&P 500 return from different vol spikes. Vol spikes
defined by: vol (1m) above 20% and 1m change in vol (data since 1990)
Vol spike $YHUDJHDQQXDOLVHG6 3UHWXUQLQWKHQH[W«
175% Since 1927 PRUHWKDQ« 1 month 3 months 6 months 1 year 2 years
Since 1990 10 -2.1% 5.1% 6.0% 7.0% 7.7%
Subsequent S&P 500 12-month return
12 -9.4% 5.4% 8.7% 9.7% 9.8%

125% 14 -12.3% 7.1% 11.1% 12.6% 12.3%
16 -17.6% 5.6% 11.9% 14.9% 13.9%
18 -21.3% 4.2% 12.8% 17.1% 15.0%
75% 20 -27.5% 0.2% 11.3% 17.3% 16.0%
22 -41.1% -9.9% 6.5% 17.0% 16.0%
24 -50.7% -19.0% 1.7% 15.7% 15.2%
25% Average 9.4% 9.4% 9.4% 9.6% 9.5%
Vol spike Hit ratio of positive S&P 500 returns in the next...
PRUHWKDQ« 1 month 3 months 6 months 1 year 2 years
-25%
10 58% 58% 56% 64% 70%
12 54% 59% 62% 72% 78%
14 55% 62% 68% 80% 87%
-75%
16 54% 60% 67% 87% 92%
0 20 40 60 80 100 120
18 51% 58% 64% 93% 97%
20 49% 56% 63% 94% 100%

22 37% 47% 53% 92% 100%
24 29% 39% 49% 90% 100%
Average 63% 69% 74% 80% 80%
Historically option selling strategies performed better in high vol regimes

While the sample size is limited (data since 1988), we can look at CBOE systematic
option strategy indices2 to see which strategies perform best in different vol regimes. In
low vol regimes, options are usually cheap, but for good reason, and as a result
investors need to be selective. During low vol regimes the returns of just buying the
S&P 500 outright are tough to beat. But based on a comparison of monthly returns
(see Exhibit 51), selling ATM puts systematically (the CBOE PUT index) has
historically provided better risk-adjusted returns, and which across vol regimes
provided the highest return/volatility ratios.
Buying puts, despite being cheap, has historically less successful in low vol clusters as
equity drawdown risk is limited. To hedge the risk of smaller corrections, we
recommended shorter-dated put spreads (98-93%) on the S&P 500. The combination of
low implied volatility and high skew resulted in higher payout multiples than they usually
have. Also, cash extraction via calls can be attractive in low vol regime to add risk in a
capital efficient way.
2
Descriptions of CBOE S&P 500 systematic option strategy indices: Buy-Write (BXY Index) – Performance
of a hypothetical 2% OTM buywrite strategy on the S&P 500 Index. The BXY is a passive total return index
based on (1) buying an S&P 500 stock index portfolio, and (2) selling a near-term S&P 500 Index call option,
generally on the third Friday of each month. Put-Write (PUT Index) – Passive investment strategy which
consists of overlaying S&P 500 short put options over a money market account invested in 1- and 3-month
T-Bills. The puts are struck ATM and are sold on a monthly basis, usually on the 3rd Friday of the month. Put
Protection Index (PPUT Index) – Performance of a hypothetical risk-management strategy that consists of a
long position indexed to the S&P 500 Index and a rolling long position in monthly 5% OTM put options. Iron
Butterfly Index (BFLY Index) – The index tracks the performance of a hypothetical options trading strategy that:
(1) sells a rolling monthly ATM put and call option, (2) buys a rolling monthly 5% OTM put and call option to
reduce the risk and (3) holds a money market account invested in 1-month T-Bills.
16 April 2018 27
With rising volatility, we find that systematic option selling strategies have
performed better since 1988 (Exhibit 51). In high vol regimes, systematic call
overwriting (the CBOE BXY index, which sells 1-month 102% calls) has performed
better and the iron butterfly overlay (the CBOE BFLY index, which sells a 1-month
straddle to buy a 5% OTM strangle) has performed best. This is because this strategy
benefits most from the higher carry in high vol regimes (and it buys back the tail risk).
Buying OTM puts systematically (the CBOE PPUT index, which buys 1-month 95%
puts) has seldom paid – but since 1988 the best opportunity to outperform with
put hedging has been in high vol regimes, although even then market timing is
required. Being in neither regime drives mixed results for systematic option strategies:
risk-adjusted returns tend to be higher for selling options but absolute are not.
Exhibit 51: Systematic overwriting strategies tend to outperform outside of low vol regimes
CBOE option strategy indices vs. S&P 500 (green shading = low vol regime, orange shading = high vol regime)
180
160
140
120
100
80
60
40
20
0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
BXY PUT PPUT BFLY
S&P 500 Buy-write Put-write Put Protection Butterfly
Regime
(Total return) (BXY) (PUT) (PPUT) (BFLY)
Avg 1-month return 1.3% 1.1% 0.9% 1.0% 0.2%
Low Vol Avg 1-month vol 9.6% 7.9% 4.9% 8.8% 8.7%
Return/ vol. 1.8 1.8 2.3 1.5 0.3
Avg 1-month return 1.4% 1.2% 1.1% 1.0% 0.6%
Neither Avg 1-month vol 12.5% 9.9% 6.8% 11.0% 9.7%
Return/ vol. 1.4 1.6 2.1 1.1 0.8
Avg 1-month return 0.2% 0.4% 0.6% 0.0% 0.6%
High Vol Avg 1-month vol 22.5% 17.4% 13.7% 16.8% 11.3%
Return/ vol. 0.1 0.3 0.6 0.0 0.7
Of course, option selling strategies not only depend on the level of volatility at which
you sell, but also on subsequent performance – with a higher vol and a more
rangebound market we would look to sell calls on rallies and sell puts on corrections
tactically (Exhibit 52). But the higher volatility improves the asymmetry for option selling
strategies; for example, the PUT index on average has outperformed the S&P 500 with
realised S&P 500 1-month vol above 20%, even in corrections of more than 4% (Exhibit
53).
However, while those strategies had better average performance than the S&P 500 in
periods of higher vol, they are likely to underperform in sharp rallies. They also have
more negative skew in strong, low vol equity rallies during low vol regimes (Exhibit 54).
In particular, systematic put selling tends to have more negative skew in low vol
16 April 2018 28
regimes but also outperformed the S&P 500 materially in more instances during high vol
regimes (Exhibit 55).
Exhibit 52: Call overwriting looks more attractive at higher Exhibit 53: ...and the same is true for put writing
volatility levels... Average 1-month return of S&P 500 Put-write index (PUT, 100% 1m put)
Average 1-month return of S&P 500 Buy-write index (BXY, 102% 1m call) vs. S&P 500 (total return, data since 1988)
vs. S&P 500 (total return, data since 1988)
S&P 500 1-month realised volatility at entry S&P 500 1-month realised volatility at entry
<7 7-9 9 - 11 11 - 14 14 - 19 19 - 24 24 - 89 Avg. <7 7-9 9 - 11 11 - 14 14 - 19 19 - 24 24 - 89 Avg.

< -4.1% -0.3 1.0 1.0 1.0 1.2 2.0 2.7 1.5 < -4.1% 0.6 2.9 2.8 2.9 2.4 4.0 4.3 3.2
-4% - -2% 0.1 0.7 0.6 1.0 1.2 1.8 1.7 1.0 -4% - -2% 1.0 2.1 2.0 2.4 2.5 3.2 3.2 2.3
-2% - 0% 0.2 0.4 0.5 0.5 0.8 1.3 1.3 0.6 -2% - 0% 0.7 1.0 1.2 1.3 1.7 2.1 1.8 1.3
0% - 2% 0.0 0.2 0.1 0.3 0.4 0.7 1.0 0.3 0% - 2% -0.3 0.0 0.0 0.2 0.4 0.8 0.8 0.2
2% - 4% -0.4 -0.3 -0.4 -0.4 -0.4 0.0 0.2 -0.3 2% - 4% -1.5 -1.4 -1.3 -1.1 -1.0 -0.6 -0.3 -1.1
4% - 5% -1.3 -1.0 -1.1 -1.3 -1.3 -1.1 0.0 -1.1 4% - 5% -2.8 -2.4 -2.4 -2.4 -2.2 -1.9 -1.0 -2.2
5% - 23% -2.5 -2.0 -2.3 -2.6 -3.0 -2.3 -1.9 -2.4 5% - 23% -4.1 -4.3 -4.2 -4.0 -4.1 -3.7 -3.5 -3.9
Avg. -0.2 0.0 0.0 -0.1 -0.2 0.2 0.5 Avg. -0.6 -0.1 0.1 0.0 -0.1 0.3 0.5
Exhibit 54: While during higher vol periods BXY outperforms, it has Exhibit 55: Systematic put selling tends to outperform (with
negative skew in low vol regimes positive tails) in high vol regimes but has negative skew in low vol
Distribution of relative 1-month returns of BXY vs. S&P 500 (total return, periods
data since 1988) Distribution of relative 1-month returns PUT vs. S&P 500 (total return,
data since 1988)
6%
-100
-1000
70% 50%
6%
High vol High vol
Low Vol 45% Low Vol

60%
Neither 40% Neither
50% 35%
40% 30%
25%
30%
20%
20% 15%
10%
10%
5%
0% 0%
below 6 -6 to -4 -4 to -2 -2 to 0 0 to 2 2 to 4 4 to 6 above 6 below 6 -6 to -4 -4 to -2 -2 to 0 0 to 2 2 to 4 4 to 6 above 6
Relative 1-month return vs. S&P 500 Relative 1-month return vs. S&P 500
Cross-asset volatility overview - high US equity vol is the odd one out
Currently, the somewhat elevated S&P 500 implied volatility (in line with realised)
is the odd one out, both across equity markets and other assets (see also SPX
Volatility Continues to Outpace Global Indices, April 16, 2018); MSCI EM vol is the only
region that is also somewhat elevated. From a cross-asset perspective, US HY credit
implied volatility, which is usually closely linked to S&P 500 vol, has recently diverged (in
line with credit spreads disconnecting from volatility), and looks cheap (Exhibit 56). The
same is the case for rates volatility, which remains very anchored, especially in Europe.
Finally, considering the strong performance of Gold and Yen in high vol regimes, implied
vol levels appear low.
16 April 2018 29
Exhibit 56: Cross-asset volatility overview

Percentile based on last 10-year
Equities Rates Credit Commodities Currencies
S&P EURO Nikkei FTSE MSCI MSCI USD USD EUR EUR iTraxx EUR/ JPY/ GBP/
CDX IG CDX HY WTI Gold Copper
500 STOXX 50 225 100 EM EAFE 2-year 10-year 2-year 10-year Europe USD USD USD
Implied (3-month ATM, %)
Current: 15.2 13.9 17.2 12.0 20.1 11.9 3.0 3.7 0.9 2.3 46.2 33.7 45.9 24.9 11.7 18.3 6.4 7.4 7.6
Percentile: 45% 6% 14% 16% 35% 8% 37% 2% 3% 1% 29% 6% 13% 22% 8% 20% 5% 6% 25%
3M change: 6.0 2.0 2.1 2.8 4.6 2.1 0.5 0.2 -0.1 -0.1 6.3 4.1 4.1 5.7 2.0 1.2 -0.8 0.0 0.6
Average: 18.1 22.1 22.7 17.8 25.3 20.3 4.0 6.0 3.2 4.5 57.4 50.8 64.6 34.5 18.7 27.4 10.5 10.9 9.9
95th: 35.9 37.1 37.1 33.5 45.2 36.2 9.4 10.7 7.5 7.6 97.2 74.5 103.6 59.7 34.5 49.7 16.4 15.7 16.5
5th: 10.0 13.6 14.9 10.4 15.2 10.9 1.5 3.9 1.0 2.7 38.9 32.3 40.9 17.1 10.8 15.5 6.4 7.2 5.8
Realised (%)
1-month: 23.4 15.8 22.6 13.8 13.8 9.8 2.9 3.6 0.5 1.9 50.8 35.7 32.4 27.2 10.0 16.3 6.2 7.1 6.5
Percentile: 84% 33% 63% 49% 46% 22% 50% 17% 5% 3% 84% 58% 19% 43% 9% 22% 15% 24% 19%
Average: 16.7 21.4 22.6 16.7 17.2 16.5 4.1 5.5 2.4 3.8 40.3 35.2 46.8 34.7 17.6 24.9 9.7 10.1 9.5
Source: Goldman Sachs Global Investment Research
Although ‘implieds’ are elevated, the implied-realised spread for the S&P 500 is
very low (Exhibit 57). EUROSTOXX 50 and MSCI EAFE implied volatility are trading at
their lowest level since the GFC relative to S&P 500 (Exhibit 58). The difference in
realised volatility helps explain this. Indeed, the S&P 500 beta to MSCI World has
increased to 1.1 (in part due to the Tech sector), while MSCI EAFE is now at just 0.9,
whereas historically it has been the other way around. We like selling S&P 500 calls
outright (see Options Research: VIX Remains Above 2017 Range: SPX Calls Are
Expensive, March 6, 2018) and also to buy options on non-US equity markets appear
attractive.
The potential for larger moves has increased, but we would be selective on
hedging (see Optimal Hedges (Part 1): Major Market Risks, April 2, 2018). After the
recent correction for the S&P 500, skew (the cost of puts vs. calls) is high again, but the
levels of volatility are still much higher. As volatility resets lower, we still like put spreads
to protect from smaller corrections. Moreover, high vol periods are in flatter vol term
structures, making longer maturities more appealing compared to 2017: the S&P 500 vol
term structure has flattened materially (Exhibit 60).
Exhibit 57: Credit spread volatility has trended down recently, Exhibit 58: S&P 500 realised vol has been high compared with
while equity vol is still high where implied vol is now
US HY CDS and S&P 500 3-month ATM implied vol 3-month implied ATM volatility vs 1-month realised
38 S&P 500 3-month implied ATM Vol 100 2.5x Implied (3m) vs realised (1m) 100%
10-year Percentile (RHS)
US CDS HY 3-month implied ATM Vol (RHS) 90%
33 2.0x 80%
85
70%
1.5x 60%
28
70 50%
1.0x 40%
23
30%
55 0.5x 20%
18
10%
0.0x 0%
40
EUR 2-year
USD 2-year
WTI
Gold
JPY/USD
CDX IG
SX5E
MSCI EM
Copper
EUR 10-year
GBP/USD
USD 10-year
CDX HY
FTSE 100
MSCI EAFE
EUR/USD
Nikkei 225
S&P 500
iTraxx Europe
13
8 25
10 11 12 13 14 15 16 17 18
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
16 April 2018 30
Exhibit 59: Implied vol for non-US equities trades at a large Exhibit 60: Equity volatility term structure is now the most flat
discount to S&P 500 across assets
3-month ATM implied volatility ratio vs. S&P 500 Aggregate vol term structure using assets from exhibit 56 indexed to
3-month level
2.2 EUROSTOXX 50 1.9 Equity

MSCI EAFE
Nikkei 225 Commodity
2.0 FX
1.7
Rates
1.8
Credit
1.5
1.6
1.4 1.3
1.2
1.1
1.0
0.9
0.8
0.6 0.7
10 11 12 13 14 15 16 17 18 1m 3m 6m 1y 2y 3y 4y 5y
Exhibit 61: The S&P 500 vol term structure has flattened materially Exhibit 62: Normalised skew has often increased during low vol
12-month vs 3-month implied ATM volatility (ratio) periods and fallen with high vol
3-month skew = (25% delta put vol - 25 delta call vol)/ATM vol
1.6 0.6
12m vs 3m vol ratio
1.5 6-month average
0.5
1.4
1.3
0.4
1.2
1.1
0.3
1.0
0.9
0.2
0.8 Skew (3m)

6-month average
0.7 0.1
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
16 April 2018 31
Appendix 1: Historical comparison of S&P 500 volatility regimes

Exhibit 63: Historical comparison of different S&P 500 volatility regimes
Low vol regimes Length S&P 500 1-month volatility S&P 500 6-month volatility
Start End (months) Average Median 75th 25th Max Min Average Median 75th 25th Max Min
Dec-43 Mar-45 14 9 8 10 8 12 5 9 9 10 9 13 8
Jul-49 Jun-50 11 9 9 11 8 14 7 10 10 11 10 12 8
Dec-51 Mar-53 15 8 7 9 6 12 5 8 8 9 7 10 7
Oct-53 Dec-54 14 9 8 10 7 13 5 10 10 12 8 13 7
Jun-58 Mar-62 46 9 9 10 7 15 5 9 9 10 8 11 7
Dec-63 May-65 16 5 5 6 4 7 3 7 6 9 5 10 5
Nov-66 Jun-69 31 8 8 10 7 16 4 9 9 10 8 14 7
Nov-70 Jul-71 8 8 8 9 7 11 5 10 9 12 8 18 7
Dec-71 Jul-72 7 8 8 9 7 10 6 10 10 10 8 12 8
Jan-77 Oct-78 20 10 10 11 9 15 6 10 10 11 9 12 9
Feb-85 Dec-85 10 10 10 10 9 13 7 10 10 11 10 12 9
Jul-92 Feb-96 43 9 9 11 7 15 5 9 9 10 8 11 7
Sep-03 Feb-07 42 11 10 12 9 17 6 11 11 12 10 18 7
Aug-12 Sep-14 25 11 11 13 9 18 5 12 12 12 11 14 9
Jun-16 Feb-18 19 8 7 9 6 20 3 9 8 12 7 16 6
Average: 22 9 9 10 7 20 3 10 10 11 8 18 5
High vol regimes Length S&P 500 1-month volatility S&P 500 6-month volatility
Dec-28 Sep-36 93 30 24 39 19 108 8 32 27 46 19 59 14

Apr-37 Mar-41 47 24 22 31 16 54 6 26 25 30 21 39 11
Feb-46 Jun-47 16 19 16 23 13 44 9 19 17 24 16 25 13
May-48 Dec-48 7 18 17 26 13 31 8 17 17 17 16 20 13
Jun-50 Dec-50 6 17 14 20 13 31 10 16 16 17 15 18 12
Apr-62 Nov-62 7 18 14 21 11 39 7 17 19 20 17 22 7
Nov-73 Oct-75 23 19 18 23 16 35 10 20 19 23 17 26 15
Aug-82 Feb-83 6 23 22 27 19 30 14 19 20 22 16 22 13
Mar-87 Jun-88 15 25 19 24 15 100 9 29 23 44 16 46 13
Aug-90 Mar-91 7 19 19 21 16 26 11 17 18 19 16 20 12
Apr-97 May-03 73 21 19 24 16 47 9 21 20 24 18 32 13
Jul-07 Sep-10 38 27 21 29 17 90 7 27 21 33 18 58 12
Aug-11 Jan-12 5 32 30 32 28 49 17 26 27 30 24 30 16
Aug-15 Mar-16 7 20 19 23 16 32 10 18 17 19 17 21 11
Average: 25 24 21 28 16 108 6 25 21 27 18 59 7
Neither Length S&P 500 1-month volatility S&P 500 6-month volatility
Sep-36 Apr-37 8 14 14 16 13 18 11 15 14 15 14 18 13
Mar-41 Dec-43 33 13 12 14 10 29 7 14 14 15 12 18 9
Mar-45 Feb-46 11 13 13 14 11 17 7 12 12 13 11 14 9
Jun-47 May-48 11 12 12 14 10 17 7 13 12 15 12 16 11
Dec-48 Jul-49 7 12 11 13 11 16 7 15 15 16 12 17 11
Jun-50 Jun-50 0 11 11 11 11 11 10 9 9 9 9 9 9
Dec-50 Dec-51 11 11 11 13 9 16 6 12 12 14 11 18 10
Mar-53 Oct-53 7 12 10 12 8 25 6 10 9 10 9 13 8
Dec-54 Jun-58 41 12 11 14 9 32 5 13 12 15 11 17 8
Mar-62 Apr-62 1 7 7 7 7 7 6 7 7 7 7 7 7
Nov-62 Dec-63 13 8 7 8 6 20 5 10 8 12 7 21 6
May-65 Nov-66 18 9 8 13 5 21 3 8 8 9 7 15 5
Jun-69 Nov-70 16 13 12 15 11 32 7 13 11 18 11 19 8
Jul-71 Dec-71 5 12 11 15 9 18 7 10 10 11 10 12 8
Jul-72 Nov-73 16 13 12 15 9 21 5 12 11 14 11 15 8
Oct-75 Jan-77 15 11 11 13 10 18 7 12 12 14 10 15 10
Oct-78 Aug-82 46 14 14 16 11 24 7 14 14 16 13 17 10
Feb-83 Feb-85 25 13 12 14 11 19 8 14 13 14 12 22 11
Dec-85 Mar-87 15 15 15 16 13 23 10 14 14 16 13 17 10
Jun-88 Aug-90 25 13 12 14 11 27 8 14 13 16 12 21 11
Mar-91 Jul-92 16 12 13 14 10 18 7 14 13 15 13 18 11
Feb-96 Apr-97 14 12 12 15 10 19 7 12 12 12 11 13 9
May-03 Sep-03 4 16 16 17 15 19 11 20 21 21 19 22 18
Feb-07 Jul-07 5 12 12 14 9 19 7 10 10 11 10 12 7
Sep-10 Aug-11 10 13 13 15 11 18 6 15 13 17 12 22 12
Jan-12 Aug-12 8 13 13 15 11 21 8 19 18 23 14 30 13
Sep-14 Aug-15 11 13 12 15 10 19 5 12 13 13 11 14 9
Mar-16 Jun-16 4 11 10 12 10 18 8 16 16 17 16 18 15
Average: 14 12 12 14 10 32 3 13 13 15 11 30 5
16 April 2018 32
Appendix 2: Overview of macro and market drivers of vol regimes
Description of indicators
US ISM manufacturing (PMI), US Unemployment rate (U-3), US Personal
consumer spending (PCE), Non-farm payroll (NFP), US CPI inflation (headline), Fed
funds rate, US yield curve (10y-2y): Changes are based on absolute variations.
US current activity indicator (CAI): It tracks US economic activity, at monthly

frequency. It is a good proxy of GDP growth.
US macro surprise index (MAP): It tracks US economic data surprises, at daily

frequency. Change based on absolute variations.
Shiller P/E ratio: Source - Shiller’s website.
US equity/bond correlation: S&P 500 vs. US 10Y bond correlation (weekly returns).
Cross asset vol percentile: Average percentile since 1970 of 6-month volatility of US
HY, US 10-year bond, S&P GSCI, Gold. Change based on absolute variations.
Volatility of rates, S&P GSCI and Gold: 6-month volatility on daily return of US 10-year
bond, S&P GSCI total return index and Gold spot price.
US HY spread (bp): BAML US HY Corporate Master II index. BAA-AAA Moody’s

spread (bp): Moody’s long-term corporate bond yield spread. MBS Spread (bp): BAML
Mortgages 30-year spread.
TED Spread (bp): It is computed as the difference between USD 3-month Libor rate
and 3-month generic government yield.
US Cyclicals vs Defensives: Based on monthly rebalancing and market cap weights.

Cyclicals sectors: Oil & Gas, Chemicals, Basic res., Con. & mat., Industrials G&S, Auto &
Parts, Retail, Media, Travel & Leis., Banks, Insurance, Real estate, Fin. Svs, Technology;
Defensives sectors: Food & Bev., Personal & H/H Goods, Healthcare, Telecom, Utilities.
Change based on percentage variations.
Equity flows (12-month sum, $ bn): Equity flows into US domiciled funds and ETFs.
US Economic Policy Uncertainty (3m avg): Made up of three components: (1)

newspaper coverage of policy-related economic uncertainty; (2) number of federal tax
code provisions set to expire in future years; and (3) disagreement among economic
forecasters as a proxy for uncertainty.
Consensus forecast dispersion (3m avg): Standard deviation of professional

forecasters’ estimates for the next 12-months of CPI inflation, T-Bill and GDP growth.
Consensus forecast revision vol: Standard deviation of MoM revision change of next
12-month consensus estimates. Standard deviation based on a 1-year window.
ISM, Inflation, NFP and Unemployment Volatility: Standard deviation of MoM change
over 12-month window. Inflation vol is based on the MoM % CPI change.
16 April 2018 33
Exhibit 64: Probability of vol regimes based on different indicators (data since 1990)
green shading = higher probability of low vol regime, orange shading = higher probability of high vol regime
R2 for S&P 500 Correlation with
Percentile of indicator Probability of low vol regime Probability of high vol regime
Indicator vol S&P 500 vol
1m 6m 1m 6m 20% 40% 60% 80% 100% Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5
ISM manufacturing (PMI) 20% 30% -45% -55% 49.1 51.5 53.6 56.1 61.4 15% 32% 32% 50% 60% 74% 38% 29% 29% 24%
3m change 8% 1% -28% -10% -2.3 -0.8 0.8 2.7 9.8 32% 37% 46% 37% 38% 47% 50% 33% 30% 33%
6m change 8% 6% -28% -24% -3.7 -1.0 1.4 3.6 17.7 30% 43% 33% 48% 37% 63% 37% 34% 25% 35%
12m change 6% 8% -25% -29% -5.2 -1.5 1.6 6.0 21.6 29% 34% 41% 47% 39% 64% 31% 33% 27% 39%
US current activity indicator (CAI) 28% 50% -52% -71% 1.5 2.4 3.3 4.2 5.7 0% 34% 49% 51% 56% 85% 34% 18% 22% 34%
3m change 8% 3% -28% -18% -0.7 -0.3 0.2 0.7 5.0 21% 34% 49% 54% 32% 59% 49% 27% 26% 32%
6m change 9% 10% -29% -31% -1.1 -0.3 0.3 1.0 7.9 22% 29% 57% 46% 37% 66% 47% 18% 34% 28%
12m change 10% 15% -31% -39% -1.6 -0.5 0.5 1.6 10.0 21% 32% 52% 44% 41% 74% 37% 21% 26% 35%
US macro surprise-MAP (since 2000) 16% 15% -39% -38% -0.5 -0.1 0.2 0.6 1.6 17% 30% 53% 58% 54% 51% 53% 35% 25% 27%
3m change 3% 0% -17% 1% -0.7 -0.2 0.2 0.8 2.2 18% 61% 47% 66% 32% 45% 29% 37% 18% 42%
6m change 5% 1% -22% -12% -0.8 -0.2 0.3 0.7 3.3 21% 58% 58% 50% 37% 45% 32% 29% 26% 39%
12m change 5% 5% -21% -22% -0.7 -0.1 0.3 0.8 2.9 29% 42% 53% 45% 55% 50% 29% 21% 42% 29%
US unemployment rate 1% 4% 7% 20% 4.6 5.3 5.8 7.3 10.0 26% 38% 48% 54% 24% 65% 37% 24% 28% 40%
Macro indicators
3m change 20% 35% 45% 59% -0.2 -0.1 0.0 0.2 1.5 63% 49% 37% 32% 9% 16% 34% 34% 38% 71%
6m change 23% 43% 48% 66% -0.4 -0.2 -0.1 0.2 2.6 59% 56% 48% 28% 0% 18% 26% 30% 43% 76%
12m change 18% 36% 42% 60% -0.7 -0.4 -0.2 0.5 4.0 54% 63% 42% 28% 3% 13% 21% 37% 49% 74%
PCE spending
3m % change 21% 24% -46% -49% 1% 1% 1% 2% 3% 28% 30% 50% 45% 38% 60% 43% 24% 24% 43%
6m % change 18% 35% -42% -59% 2% 2% 3% 3% 5% 22% 28% 46% 57% 38% 65% 43% 24% 22% 40%
12m % change 11% 27% -33% -52% 4% 5% 6% 6% 9% 26% 27% 38% 60% 40% 54% 43% 29% 21% 46%
Non-farm payrolls
3m change 25% 48% -50% -70% 15 410 601 761 1142 0% 35% 70% 44% 41% 85% 31% 13% 26% 37%
6m change 21% 44% -45% -67% 33 942 1176 1474 2112 0% 37% 72% 47% 35% 82% 35% 6% 21% 49%
12m change 14% 32% -38% -57% -152 1850 2295 2857 3905 4% 31% 69% 62% 25% 74% 37% 10% 16% 56%
US CPI inflation (headline) 0% 5% -7% -23% 1.6 2.2 2.8 3.3 6.4 21% 50% 51% 47% 22% 54% 38% 30% 19% 51%
3m change 5% 8% -21% -28% -0.5 -0.1 0.1 0.5 4.2 24% 44% 46% 37% 40% 47% 34% 30% 40% 43%
6m change 3% 12% -16% -35% -0.7 -0.2 0.2 0.7 4.5 16% 51% 52% 43% 28% 43% 35% 28% 32% 54%
12m change 1% 5% -7% -23% -1.2 -0.2 0.3 1.1 3.5 18% 41% 63% 41% 28% 44% 34% 16% 35% 63%
Fed funds Rate 1% 2% -7% -16% 0.2 1.5 4.0 5.4 8.3 37% 44% 54% 34% 21% 27% 35% 39% 32% 59%
3m change 10% 14% -32% -38% -0.2 0.0 0.0 0.2 0.9 7% 37% 43% 30% 75% 63% 37% 34% 38% 22%
6m change 11% 18% -33% -42% -0.6 0.0 0.0 0.3 1.5 7% 34% 38% 37% 74% 63% 41% 34% 31% 25%
12m change 15% 22% -39% -47% -1.1 -0.2 0.0 0.7 2.7 7% 25% 39% 39% 79% 63% 49% 32% 31% 18%
Shiller PE 0% 0% -1% -5% 20 23 26 29 44 18% 49% 60% 51% 13% 47% 28% 18% 18% 82%
3m % change 30% 9% -55% -30% -3% 0% 2% 6% 23% 13% 38% 54% 57% 28% 74% 34% 19% 24% 43%
6m % change 29% 25% -54% -50% -5% 1% 4% 9% 41% 9% 43% 54% 50% 35% 88% 28% 18% 19% 40%
12m % change 25% 35% -50% -59% -6% 2% 8% 15% 58% 1% 59% 52% 44% 34% 93% 24% 15% 10% 51%
US equity/bond correlation
3-month window 7% 9% -26% -31% -0.6 -0.3 0.1 0.4 0.9 24% 30% 49% 50% 38% 49% 57% 37% 24% 28%
6-month window 6% 11% -25% -33% -0.5 -0.3 0.0 0.4 0.8 22% 24% 55% 49% 40% 49% 51% 39% 30% 26%
12-month window 5% 9% -23% -30% -0.4 -0.3 0.0 0.4 0.7 21% 40% 46% 49% 35% 40% 48% 46% 38% 24%
Cross asset vol percentile (6m) 27% 49% 52% 70% 30.0 43.0 54.7 67.0 98.5 66% 35% 54% 34% 1% 7% 34% 25% 43% 84%
US 10-year rates vol (6m) 21% 51% 46% 71% 5.8 6.3 7.2 8.5 15.5 53% 56% 39% 26% 16% 13% 26% 39% 51% 63%
GSCI vol (6m) 25% 45% 50% 67% 13.1 17.6 21.2 24.9 54.2 75% 34% 19% 44% 18% 3% 37% 48% 38% 68%
Gold vol (6m) 19% 35% 44% 59% 10.2 13.2 15.2 18.8 38.9 50% 43% 36% 28% 34% 16% 41% 37% 43% 56%
US HY spread (bp) 52% 71% 72% 84% 361 456 552 697 1978 51% 87% 45% 7% 0% 22% 4% 22% 47% 97%
3m change 26% 2% 51% 15% -76 -29 7 42 1150 19% 63% 51% 48% 10% 50% 15% 27% 30% 71%
6m change 28% 15% 53% 38% -107 -38 8 92 1321 37% 51% 60% 41% 1% 34% 15% 16% 40% 88%
12m change 32% 34% 57% 58% -143 -67 18 155 1403 57% 62% 48% 24% 0% 19% 10% 31% 44% 88%
BAA-AAA Moody’s spread (bp) 43% 63% 66% 80% 68 81 92 114 343 59% 61% 41% 29% 1% 32% 22% 25% 29% 85%
Market indicators
3m change 17% 2% 41% 14% -12 -4 2 10 191 34% 54% 43% 44% 15% 40% 26% 29% 35% 63%
6m change 18% 12% 43% 34% -16 -5 2 14 204 43% 50% 49% 41% 9% 32% 31% 24% 29% 76%
12m change 24% 27% 49% 52% -26 -8 4 26 233 63% 51% 48% 25% 4% 25% 28% 24% 41% 75%
TED spread (bp) 25% 13% 50% 35% 23 35 48 67 315 34% 56% 50% 42% 7% 44% 21% 13% 32% 82%
3m change 2% 3% 14% -18% -11 -3 2 12 224 22% 43% 55% 41% 31% 54% 38% 15% 31% 54%
6m change 1% 2% 12% -14% -16 -3 4 15 182 21% 39% 52% 49% 30% 51% 35% 24% 26% 56%
12m change 2% 0% 16% -2% -19 -3 4 16 164 16% 51% 44% 45% 35% 55% 28% 32% 22% 56%
MBS spread (since 1997, bp) 24% 20% 49% 45% 24 36 49 69 156 30% 40% 60% 39% 0% 51% 25% 21% 46% 96%
3m change 0% 4% 2% -21% -12 -4 4 13 82 27% 51% 37% 35% 28% 61% 38% 40% 46% 52%
6m change 0% 2% 6% -15% -16 -4 5 17 80 28% 43% 41% 49% 16% 63% 40% 39% 29% 67%
12m change 3% 0% 16% -3% -20 -6 6 26 89 21% 46% 48% 51% 10% 70% 35% 32% 24% 76%
US cyclicals vs. defensives
3m % change 10% 2% -31% -14% -4% -1% 2% 5% 21% 18% 43% 48% 46% 35% 58% 28% 31% 34% 43%
6m % change 13% 9% -36% -31% -5% -1% 2% 6% 27% 18% 40% 42% 51% 40% 61% 36% 25% 31% 41%
12m % change 12% 16% -34% -40% -7% -2% 2% 9% 41% 3% 28% 57% 54% 49% 70% 31% 22% 27% 44%
Equity flows (12m sum, $ bn) 1% 6% -10% -24% 78 134 209 260 419 19% 48% 32% 40% 51% 32% 43% 49% 43% 26%
3m change 15% 16% -39% -40% -27 -2 9 26 125 12% 37% 49% 37% 56% 74% 39% 18% 36% 28%
6m change 12% 21% -34% -46% -46 -4 15 49 203 9% 37% 41% 34% 69% 74% 37% 31% 30% 22%
12m change 11% 20% -33% -45% -78 -8 28 72 348 9% 40% 15% 66% 62% 69% 40% 44% 18% 22%
US yield curve (10y-2y) 1% 3% 10% 18% 0.3 0.9 1.5 2.1 2.8 31% 46% 37% 38% 38% 52% 28% 36% 41% 36%
3m change 4% 4% 20% 19% -0.2 -0.1 0.0 0.2 1.0 53% 58% 29% 31% 21% 35% 22% 41% 40% 54%
6m change 5% 6% 22% 25% -0.4 -0.1 0.1 0.4 1.5 60% 48% 43% 23% 17% 22% 29% 41% 38% 61%
12m change 10% 10% 31% 32% -0.6 -0.2 0.1 0.8 2.1 66% 43% 43% 25% 14% 10% 46% 29% 40% 67%
Economic policy uncert. (3m avg) 10% 19% 32% 43% 78 94 108 131 216 47% 49% 39% 41% 15% 32% 32% 28% 41% 59%
3m change 11% 3% 34% 18% -15 -3 4 14 75 38% 50% 43% 40% 19% 37% 31% 31% 29% 65%
6m change 15% 14% 38% 38% -18 -5 5 19 73 46% 54% 39% 34% 18% 28% 24% 27% 47% 68%
12m change 20% 26% 45% 51% -23 -7 5 22 78 63% 59% 27% 32% 9% 19% 18% 36% 41% 79%
Consensus forecast disp. (3m avg) 12% 18% 34% 42% 31% 44% 56% 70% 98% 60% 48% 37% 41% 6% 27% 27% 28% 37% 78%
Macro uncertainty
CPI inflation 19% 36% 43% 60% 0.26 0.29 0.33 0.38 0.91 46% 54% 49% 43% 0% 42% 31% 28% 24% 69%
GDP 12% 26% 35% 51% 0.24 0.29 0.34 0.42 0.71 51% 55% 36% 51% 0% 19% 19% 40% 37% 78%
T-bills forecast 5% 3% 22% 18% 0.28 0.36 0.42 0.51 0.78 64% 34% 34% 24% 35% 13% 37% 42% 48% 54%
Cons. forecast revision vol (1y) 17% 29% 42% 54% 32% 44% 56% 69% 99% 60% 66% 56% 11% 6% 35% 22% 16% 52% 69%
CPI inflation 15% 35% 39% 59% 0.1 0.1 0.1 0.2 0.6 35% 60% 62% 37% 5% 50% 29% 9% 43% 61%
GDP 18% 35% 42% 59% 0.1 0.1 0.2 0.2 0.6 71% 57% 51% 18% 0% 20% 37% 23% 35% 77%
T-bills forecast 17% 28% 41% 53% 0.1 0.1 0.2 0.2 0.4 64% 38% 37% 35% 23% 18% 38% 23% 46% 67%
ISM vol (1y) 1% 6% 11% 25% 1.3 1.5 1.7 2.1 3.9 46% 43% 33% 44% 25% 38% 32% 43% 38% 41%
Inflation vol (1y) 12% 25% 35% 50% 0.1 0.2 0.2 0.3 0.8 50% 34% 31% 31% 44% 34% 24% 52% 44% 40%
NFP vol (1y) 15% 29% 39% 54% 76 93 108 124 279 60% 35% 48% 46% 1% 7% 40% 34% 29% 82%
Unemployment Vol (1y) 8% 10% 28% 31% 0.10 0.12 0.13 0.15 0.22 46% 43% 36% 37% 29% 28% 43% 36% 43% 44%
Note: Cons. Forecast disp. (3m avg) and Consensus forecast vol (1y) stats are referring to the average percentile level of subcomponents
16 April 2018 34
Exhibit 65: Probability of vol regimes based on different indicators (data since 1950, where available)
green shading = higher probability of low vol regime, orange shading = higher probability of high vol regime
Correlation with
Start Percentile of indicator Uncond. Probability of low vol regime Uncond. Probability of high vol regime
Indicator S&P 500 vol
date Prob. Prob.
1m 6m 20% 40% 60% 80% 100% Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5
ISM manufacturing (PMI) 1951 -23% -31% 47.8 51.8 55.0 58.2 72.1 37% 25% 28% 34% 49% 49% 23% 32% 30% 23% 21% 7%
3m change -14% -10% -3.4 -1.1 0.9 3.3 20.9 37% 26% 29% 45% 38% 45% 23% 19% 32% 23% 20% 19%
6m change -15% -16% -5.2 -2.0 1.2 4.6 28.8 37% 20% 34% 37% 45% 48% 23% 26% 25% 21% 23% 18%
12m change -12% -17% -7.8 -2.2 2.2 7.4 31.0 37% 29% 28% 41% 45% 41% 23% 25% 29% 21% 19% 19%
US current activity indicator (CAI) 1973 -38% -52% 1.5 2.6 3.7 4.6 8.0 30% 0% 32% 41% 34% 42% 32% 68% 27% 18% 25% 20%
3m change -14% -10% -0.9 -0.3 0.2 0.8 7.6 29% 14% 31% 37% 39% 27% 32% 35% 44% 24% 29% 30%
6m change -15% -18% -1.4 -0.4 0.2 1.1 9.8 29% 11% 25% 45% 38% 28% 32% 44% 41% 17% 31% 28%
12m change -19% -24% -2.2 -0.6 0.4 1.6 12.8 29% 11% 29% 41% 44% 23% 32% 49% 36% 18% 29% 29%
US macro surprise-MAP 2000 -39% -38% -0.5 -0.1 0.2 0.6 1.6 42% 17% 30% 53% 58% 54% 38% 51% 53% 35% 25% 27%
3m change -17% 1% -0.7 -0.2 0.2 0.8 2.2 45% 18% 61% 47% 66% 32% 34% 45% 29% 37% 18% 42%
6m change -22% -12% -0.8 -0.2 0.3 0.7 3.3 45% 21% 58% 58% 50% 37% 34% 45% 32% 29% 26% 39%
12m change -21% -22% -0.7 -0.1 0.3 0.8 2.9 45% 29% 42% 53% 45% 55% 34% 50% 29% 21% 42% 29%
US unemployment rate 1951 15% 25% 4.4 5.3 5.9 7.2 10.8 37% 35% 39% 40% 55% 17% 23% 20% 27% 24% 16% 27%
Macro indicators
3m change 23% 32% -0.3 -0.1 0.0 0.2 2.1 37% 48% 43% 41% 34% 19% 23% 11% 22% 19% 22% 39%
6m change 23% 34% -0.4 -0.2 0.0 0.3 2.9 37% 48% 43% 45% 29% 20% 23% 9% 22% 16% 24% 42%
12m change 19% 30% -0.8 -0.4 -0.1 0.7 4.0 37% 37% 49% 46% 28% 24% 23% 15% 13% 20% 26% 39%
PCE spending 1961
3m % change -26% -28% 1% 1% 2% 2% 5% 36% 30% 44% 39% 41% 26% 26% 41% 27% 18% 25% 19%
6m % change -25% -35% 2% 3% 3% 5% 8% 36% 31% 43% 42% 30% 32% 26% 48% 22% 22% 22% 17%
12m % change -22% -30% 4% 6% 7% 9% 14% 36% 36% 42% 42% 32% 27% 26% 42% 26% 24% 27% 12%
Non-farm payrolls 1961
3m change -37% -52% 142 417 613 782 1739 35% 6% 33% 60% 42% 33% 26% 61% 19% 10% 19% 23%
6m change -34% -50% 313 892 1201 1519 3022 35% 9% 32% 63% 38% 31% 26% 57% 23% 7% 18% 27%
12m change -28% -43% 240 1817 2388 3005 4902 35% 15% 32% 58% 42% 26% 26% 54% 22% 9% 18% 30%
US CPI inflation (headline) 1951 7% 3% 1.5 2.5 3.4 5.1 14.6 37% 43% 47% 51% 27% 17% 23% 23% 27% 14% 29% 20%
3m change -8% -14% -0.5 -0.1 0.2 0.5 5.6 37% 31% 42% 40% 42% 29% 23% 28% 20% 19% 23% 23%
6m change -3% -13% -0.9 -0.3 0.2 0.8 7.2 37% 28% 44% 50% 39% 22% 23% 24% 19% 16% 22% 31%
12m change 4% -1% -1.4 -0.3 0.4 1.4 10.7 37% 22% 55% 53% 37% 17% 23% 23% 18% 14% 20% 38%
Fed funds Rate 1955 1% -4% 1.5 3.5 5.3 7.6 19.1 36% 42% 48% 50% 29% 10% 24% 28% 20% 16% 40% 15%
3m change -10% -18% -0.4 0.0 0.1 0.5 8.0 36% 18% 34% 38% 43% 47% 24% 37% 30% 25% 16% 12%
6m change -11% -21% -0.8 0.0 0.2 0.9 10.1 36% 21% 38% 33% 39% 46% 24% 37% 33% 24% 21% 7%
12m change -15% -23% -1.3 -0.1 0.4 1.4 10.0 36% 27% 31% 36% 36% 48% 24% 37% 29% 29% 17% 9%
Shiller PE 1951 6% 6% 12 17 21 25 44 37% 22% 25% 40% 60% 36% 23% 15% 23% 16% 16% 43%
3m % change -40% -21% -4% -1% 2% 6% 26% 37% 17% 34% 47% 53% 34% 23% 43% 17% 13% 12% 28%
6m % change -36% -35% -7% 0% 4% 9% 41% 37% 10% 35% 52% 50% 36% 23% 48% 17% 11% 11% 26%
12m % change -31% -38% -10% 0% 7% 16% 58% 37% 10% 44% 52% 46% 32% 23% 51% 16% 11% 8% 26%
US equity/bond correlation 1964
3-month window -22% -26% -0.3 0.1 0.3 0.5 0.9 34% 26% 46% 41% 31% 24% 27% 54% 27% 15% 15% 22%
6-month window -21% -29% -0.3 0.1 0.3 0.5 0.8 34% 24% 50% 43% 27% 25% 27% 50% 31% 21% 11% 21%
12-month window -20% -28% -0.3 0.0 0.3 0.4 0.7 34% 31% 43% 42% 28% 25% 27% 42% 35% 28% 10% 18%
Cross asset vol percentile (6m) 1971 45% 58% 30.6 42.9 54.8 66.9 98.5 30% 62% 27% 40% 22% 1% 30% 6% 19% 19% 49% 58%
US 10-year rates vol (6m) 1963 38% 51% 4.2 5.9 6.8 8.5 17.0 33% 41% 51% 39% 24% 12% 27% 13% 12% 28% 38% 44%
GSCI vol (6m) 1971 43% 56% 11.6 14.6 18.4 23.1 54.2 31% 57% 34% 16% 29% 17% 31% 3% 19% 28% 38% 65%
Gold vol (6m) 1971 22% 26% 11.5 14.4 17.8 24.1 68.2 30% 48% 35% 33% 26% 10% 30% 18% 34% 26% 38% 35%
US HY spread (bps) 1986 63% 74% 368 448 534 671 1978 35% 58% 70% 36% 11% 0% 37% 19% 13% 27% 33% 91%
3m change 44% 13% -66 -24 9 48 1150 35% 24% 55% 42% 42% 11% 37% 45% 20% 29% 25% 64%
6m change 48% 35% -103 -33 11 99 1321 33% 37% 43% 54% 32% 0% 38% 33% 21% 15% 38% 81%
12m change 49% 51% -132 -66 25 152 1403 33% 56% 49% 44% 17% 0% 38% 19% 18% 34% 36% 81%
BAA-AAA Moody’s spread (bps) 1951 45% 56% 64 77 92 123 343 37% 44% 65% 45% 22% 9% 23% 12% 12% 19% 28% 42%
Market indicators
3m change 25% 12% -11 -3 2 10 191 37% 30% 50% 50% 43% 11% 23% 26% 19% 11% 22% 34%
6m change 28% 26% -14 -5 2 15 204 37% 36% 51% 49% 38% 10% 23% 21% 18% 15% 21% 39%
12m change 32% 36% -22 -8 3 22 233 37% 46% 47% 42% 36% 13% 23% 14% 15% 21% 20% 42%
TED spread (bps) 1987 46% 38% 23 37 55 84 315 33% 34% 54% 48% 28% 1% 38% 44% 19% 19% 41% 69%
3m change 22% -13% -13 -3 3 13 224 34% 13% 42% 54% 37% 24% 39% 58% 33% 17% 33% 54%
6m change 16% -8% -17 -3 4 16 182 34% 15% 37% 51% 48% 22% 39% 52% 33% 24% 24% 61%
12m change 25% 10% -23 -4 4 19 205 34% 9% 48% 46% 45% 24% 39% 52% 27% 31% 24% 62%
MBS spread (bps) 1997 49% 45% 24 36 49 69 156 34% 30% 40% 60% 39% 0% 48% 51% 25% 21% 46% 96%
3m change 2% -21% -12 -4 4 13 82 35% 27% 51% 37% 35% 28% 48% 61% 38% 40% 46% 52%
6m change 6% -15% -16 -4 5 17 80 35% 28% 43% 41% 49% 16% 48% 63% 40% 39% 29% 67%
12m change 16% -3% -20 -6 6 26 89 35% 21% 46% 48% 51% 10% 48% 70% 35% 32% 24% 76%
US cyclicals vs. defensives 1974
3m % change -24% -10% -4% -1% 1% 5% 23% 31% 13% 39% 40% 37% 25% 32% 41% 16% 31% 31% 38%
6m % change -27% -24% -6% -2% 2% 7% 33% 31% 13% 34% 43% 38% 26% 32% 44% 26% 20% 30% 37%
12m % change -24% -28% -8% -3% 2% 10% 41% 31% 8% 31% 47% 41% 28% 32% 44% 32% 27% 23% 31%
Equity flows (12m sum, $ bn) 1985 -7% -19% 31 105 173 251 419 35% 14% 31% 46% 34% 49% 37% 21% 44% 39% 49% 30%
3m change -35% -37% -22 -1 7 21 125 35% 14% 34% 35% 39% 53% 37% 69% 42% 18% 23% 33%
6m change -30% -42% -37 -3 11 38 203 35% 10% 33% 34% 37% 61% 37% 73% 34% 26% 27% 24%
12m change -28% -40% -60 -1 21 58 348 35% 9% 34% 18% 52% 63% 37% 66% 35% 41% 19% 21%
US yield curve (10y-2y) 1951 15% 25% 0.0 0.4 0.8 1.4 2.8 37% 23% 48% 39% 36% 39% 23% 14% 22% 14% 27% 36%
3m change 10% 15% -0.3 -0.1 0.0 0.3 3.1 37% 41% 48% 37% 35% 24% 23% 17% 13% 27% 24% 31%
6m change 13% 20% -0.4 -0.1 0.1 0.4 2.2 37% 39% 48% 44% 30% 23% 23% 14% 15% 22% 24% 38%
12m change 18% 24% -0.6 -0.2 0.1 0.6 2.5 37% 46% 32% 42% 39% 26% 23% 6% 22% 17% 27% 41%
Economic policy uncert. (3m avg) 1986 27% 39% 81 96 111 129 216 35% 44% 47% 30% 39% 14% 37% 32% 30% 28% 39% 55%
3m change 23% 13% -15 -4 4 14 119 35% 34% 39% 42% 37% 23% 37% 38% 28% 33% 27% 59%
6m change 32% 37% -19 -5 4 18 73 34% 38% 48% 37% 30% 16% 38% 29% 25% 25% 43% 69%
12m change 37% 46% -23 -8 3 20 78 34% 55% 53% 18% 32% 9% 38% 23% 18% 32% 43% 74%
Consensus forecast disp. (3m avg) 1991 34% 42% 31% 44% 56% 70% 98% 33% 60% 48% 37% 41% 6% 39% 27% 27% 28% 37% 78%
Macro uncertainty
CPI inflation 43% 60% 0.26 0.29 0.33 0.38 0.91 38% 46% 54% 49% 43% 0% 39% 42% 31% 28% 24% 69%
GDP 35% 51% 0.24 0.29 0.34 0.42 0.71 38% 51% 55% 36% 51% 0% 39% 19% 19% 40% 37% 78%
T-bills forecast 22% 18% 0.28 0.36 0.42 0.51 0.78 38% 64% 34% 34% 24% 35% 39% 13% 37% 42% 48% 54%
Cons. forecast revision vol (1y) 1992 42% 54% 32% 44% 56% 69% 99% 40% 60% 66% 56% 11% 6% 39% 35% 22% 16% 52% 69%
CPI inflation 39% 59% 0.1 0.1 0.1 0.2 0.6 39% 35% 60% 62% 37% 5% 39% 50% 29% 9% 43% 61%
GDP 42% 59% 0.1 0.1 0.2 0.2 0.6 39% 71% 57% 51% 18% 0% 39% 20% 37% 23% 35% 77%
T-bills forecast 41% 53% 0.1 0.1 0.2 0.2 0.4 39% 64% 38% 37% 35% 23% 39% 18% 38% 23% 46% 67%
ISM vol (1y) 1952 -9% -7% 1.5 1.9 2.3 3.0 6.0 37% 40% 33% 42% 36% 33% 23% 29% 39% 9% 20% 17%
Inflation vol (1y) 1986 23% 33% 0.1 0.2 0.2 0.3 0.8 37% 49% 35% 43% 32% 25% 23% 23% 14% 15% 30% 30%
NFP vol (1y) 6% 12% 82 104 123 165 385 37% 46% 37% 42% 29% 30% 23% 9% 33% 26% 20% 25%
Unemployment Vol (1y) 1986 -7% -7% 0.1 0.1 0.2 0.2 0.4 37% 43% 37% 39% 35% 30% 23% 25% 33% 27% 14% 14%
Note: Cons. Forecast disp. (3m avg) and Consensus forecast vol (1y) stats are referring to the average percentile level of subcomponents
16 April 2018 35
Appendix 3: Correlation matrix of macro and market drivers

Exhibit 66: Correlation matrix among Macro, Markets and Macro Uncertainty indicators (data since 1990)
Macro Indicators Markets Indicators Macro Uncertainty Indicators
Cross US Yield CPI GDP Bills CPI GDP Bills
PCE Unemp. NFP Fed fund Shiller PE US HY US HY BAA TED EPU EPU Inflation NFP vol
Indicator ISM US CAI Asset Vol Rates Vol GSCI Vol Curve 12m Forecast Forecast Forecast Revision Revision Revision
6m % chg 6m chg 3m chg 12m chg 12m chg Spread 12m chg spread Spread 3m avg 12m chg vol (1y) (1y)
Perc. chg Disp. Disp. Disp. vol (1y) vol (1y) vol (1y)
ISM 1.0
US CAI 0.8 1.0

Macro Indicators
PCE 6m % chg 0.5 0.8 1.0
Unemp. 6m chg -0.6 -0.8 -0.6 1.0

NFP 3m chg 0.6 0.9 0.7 -0.9 1.0

Fed fund
12m chg
0.5 0.6 0.4 -0.6 0.7 1.0
Shiller PE
12m chg
0.6 0.7 0.5 -0.5 0.6 0.4 1.0
Cross Asset Vol
Perc.
-0.3 -0.6 -0.5 0.5 -0.6 -0.4 -0.5 1.0
Rates Vol -0.3 -0.5 -0.5 0.5 -0.6 -0.4 -0.4 0.8 1.0
Markets Indicators
GSCI Vol -0.5 -0.7 -0.6 0.7 -0.7 -0.3 -0.5 0.8 0.6 1.0
US HY Spread -0.7 -0.8 -0.7 0.7 -0.8 -0.6 -0.7 0.7 0.7 0.7 1.0
US HY 12m chg -0.6 -0.6 -0.4 0.4 -0.4 -0.3 -0.6 0.3 0.3 0.4 0.6 1.0
BAA spread -0.5 -0.8 -0.8 0.7 -0.8 -0.5 -0.6 0.7 0.7 0.7 0.9 0.6 1.0
TED Spread -0.3 -0.3 -0.2 0.3 -0.2 -0.2 -0.1 0.1 0.1 0.2 0.3 0.6 0.3 1.0
US Yield Curve
12m chg
-0.4 -0.5 -0.3 0.6 -0.6 -0.8 -0.3 0.3 0.3 0.2 0.4 0.1 0.3 0.2 1.0
EPU 3m avg -0.2 -0.5 -0.5 0.3 -0.4 -0.4 -0.3 0.5 0.5 0.3 0.6 0.1 0.5 -0.1 0.2 1.0
EPU 12m chg -0.5 -0.5 -0.3 0.5 -0.4 -0.3 -0.5 0.4 0.4 0.5 0.5 0.6 0.4 0.4 0.2 0.4 1.0
CPI Forecast
Disp.
-0.4 -0.6 -0.6 0.7 -0.7 -0.5 -0.3 0.5 0.6 0.7 0.7 0.2 0.7 0.3 0.3 0.5 0.4 1.0
Macro Uncertainty Indicators
GDP Forecast
Disp. -0.4 -0.5 -0.4 0.7 -0.7 -0.6 -0.3 0.4 0.5 0.4 0.6 0.1 0.5 0.2 0.5 0.4 0.3 0.6 1.0
Bills Forecast
Disp. -0.2 -0.2 0.0 0.4 -0.3 -0.2 -0.3 0.1 0.2 0.2 0.2 0.1 0.1 0.2 0.3 -0.3 0.2 0.3 0.4 1.0
CPI Revision
vol (1y) -0.3 -0.6 -0.7 0.7 -0.7 -0.4 -0.4 0.6 0.6 0.7 0.6 0.3 0.7 0.1 0.2 0.4 0.3 0.7 0.5 0.1 1.0
GDP Revision
vol (1y)
-0.3 -0.5 -0.4 0.6 -0.7 -0.6 -0.5 0.5 0.6 0.5 0.7 0.1 0.5 -0.1 0.4 0.4 0.2 0.5 0.6 0.3 0.7 1.0
Bills Revision
vol (1y) -0.5 -0.5 -0.3 0.7 -0.6 -0.5 -0.5 0.3 0.6 0.4 0.6 0.4 0.5 0.3 0.4 0.2 0.4 0.5 0.6 0.6 0.4 0.6 1.0
Inflation vol (1y) -0.3 -0.6 -0.6 0.6 -0.6 -0.2 -0.4 0.5 0.4 0.7 0.5 0.3 0.7 0.2 0.2 0.2 0.3 0.6 0.3 0.1 0.8 0.4 0.3 1.0
NFP vol (1y) -0.3 -0.5 -0.4 0.5 -0.6 -0.3 -0.2 0.5 0.5 0.6 0.6 0.0 0.5 0.1 0.2 0.4 0.3 0.7 0.6 0.4 0.6 0.6 0.4 0.5 1.0
16 April 2018 36
Option specific disclosures
Price target methodology: Please refer to the analyst’s previously published research
for methodology and risks associated with equity price targets.
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General Options Risks – The risks below and any other options risks mentioned in this
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16 April 2018 37
Disclosure Appendix
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16 April 2018 38
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Mindcraft: Our Thematic Deep Dives
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PORTFOLIO STRATEGY RESEARCH | April 16, 2018 | 11:20PM BST

GLOBAL STRATEGY PAPER NO. 28

A taste of the high (vol) life

Goldman Sachs International

This report is intended for distribution to GS institutional clients only.

A volatile start to 2018, led by higher equity volatility

90 Great VIX S&P 500 1-month realised Black Global Financial

Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research

100% Equity 100% S&P 500

Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research

-9m -6m -3m +3m +6m +9m

Source: Bloomberg, Goldman Sachs Global Investment Research

30 25th/75th Percentile 115

-9m -6m -3m +3m +6m +9m

Source: Datastream, Goldman Sachs Global Investment Research

25 Lehman US rating 25 R† = 0.62

Daily change in VIX

Higher portfolio risk YTD with little diversification across assets

Source: Datastream, Haver Analytics, Goldman Sachs Global Investment Research

A brief history of vol regimes — from cyclical drivers to structural shifts

Source: NBER, Bloomberg, Goldman Sachs Global Investment Research

Switching gears - markets regularly switch between vol regimes...

Source: Bloomberg, Goldman Sachs Global Investment Research.

...although their characteristics have varied in the last 100 years

Source: Bloomberg, Goldman Sachs Global Investment Research

140 Months in high vol regime 100

Months in low vol regime 90

procyclically; (4) levered or liquidity-constrained exchange-traded products, e.g, on high

Exhibit 19: Vol of vol has trended up since the GFC

Source: Bloomberg, Goldman Sachs Global Investment Research

Source: Bloomberg, Goldman Sachs Global Investment Research

R† since 1990 = 0.15

R† since 1990 = 0.54

Source: Bloomberg, Goldman Sachs Global Investment Research

Source: Bloomberg, Goldman Sachs Global Investment Research

120 25th/75th Percentile 70% 25th/75th Percentile

Probable cause — potential macro and market drivers of vol regimes

Establishing probable cause looking at macro and market drivers of vol

To assess the ‘probable cause’ of a vol regime, we looked at a wide range of

75 80% Probability High vol regime

70 Probability Low vol regime

350 90% Probability High vol regime

Narrowing down the suspects - a probability model for vol regimes

The ‘Goldilocks’ backdrop of accelerating global growth with anchored inflation

9.9 13.5 NM NM 68% 21% NM NM 8% 21% NM NM

13.0 14.7 16.6 NM 57% 24% 14% NM 11% 19% 38% NM

Source: Bloomberg, Goldman Sachs Global Investment Research

The end of ‘boring’ - lower risk-adjusted returns for equities

Source: Bloomberg, Goldman Sachs Global Investment Research

-2.0 -0.8 3-month

2.0% Equities Bonds Credit Commodities FX

Source: Datastream, Haver Analytics, Goldman Sachs Global Investment Research

Low vol regime

Source: Bloomberg, Goldman Sachs Global Investment Research

Volatility as a market timing signal for when to buy the dip

12 -9.4% 5.4% 8.7% 9.7% 9.8%

20 49% 56% 63% 94% 100%

Historically option selling strategies performed better in high vol regimes

Source: Bloomberg, Goldman Sachs Global Investment Research

S&P 500 1-month return

Low Vol 45% Low Vol

Exhibit 56: Cross-asset volatility overview

Source: Goldman Sachs Global Investment Research