Volatility is here to stay. Markets are hostages of very volatile news flow. Trade-related anxiety is driving the swing (pessimism of a broken deal between China and US led to a correction in May while the renewed hope of a partial deal brought equity markets back to yearly highs in June).
More recently, the ultra-dovish tone of major Central Banks added to the optimism, signalling the commitment to extend the current cycle, amid a deceleration of global growth and a not brilliant earnings outlook. Against this backdrop of uncertainty we expect global equities to remain in a trading range, pointing to the need for investors to focus more on relative value opportunities across regions and names to extract value rather than betting on strong directional calls.
Bad VRP provides a direct assessment of the degree to which asset downside risk may become extreme, while good VRP proxies for the degree to which asset upside potential may shrink. We find that bad VRP is important economically; in the cross-section, a one standard- deviation increase is associated with an increase of up to 13% in annualized expected excess returns.
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