Asia risk falls, euro risk rises
Asian stocks shot the lights out over the past year–but at what price in terms of risk? Surprisingly, the price of risk in Asia has fallen over the past year while the price of risk in Europe has risen. Both converge around the 20% mark for implied volatility. In US dollar terms, the cost of hedging a broad portfolio of Chinese stocks with index options fell–while the cost of hedging Europe rose. The same is true of Japan.
What makes China less risky? The main reason lies in economic policy. With 4% real interest rates, monetary policy actually has a great deal of maneuvering room in China. The real German 2-year yield (as measured by inflation-tracking government bonds) is now around -1.0%. China’s central bank still can offer a put under Chinese valuations while THe Fed and ECB are pushing on strings.
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