I’ve been getting lots of questions with respect to how volatility acts around US elections. We don’t have a lot of history to work with, but we do have data on how the four volatility indexes based on SPX option trading did four years ago. I did a little digging and reconstructed the VXST – VIX – VXV – VXMT curves from the Friday before and Friday after the 2012 election.
The pre-election curve was slightly inverted with VXST at a premium to spot VIX. The week of the election VXST dropped 0.01 while the rest of the curve moved higher. This was a result of the S&P 500 dropping about 2.5% during the week of the election. Most likely the shift of risk from the election to a drop in the stock market kept VXST basically unchanged. Short dated volatility was most reactionary to the 2012 election and is behaving the same way before the 2016 election, although at more of an extreme this time around. Short term volatility will most likely fall back in line with the rest of the curve after the election is past us, however, the levels of VIX, VXV, and VXMT will be determined by the outcome of the election this coming week.