Is Volatility Back for Good?

The week ended with high implied volatilities across the board. Eric Lam et al. at Bloomberg wrote:

The calm in stocks worldwide is giving way to concern, with investors in Europe and the U.S. rushing to hedge against declines and a Credit Suisse Group AG index flashing a warning as the list of economic and political obstacles grows.

There’s no shortage of potential concerns. Tensions over North Korea’s nuclear program have intensified days after the U.S. fired missiles at a Syrian airfield. There’s uncertainty over the outcome of the French election, with the first round scheduled for April 23, and in Britain doubts are emerging on whether the economy can withstand the political shocks the Brexit negotiations will bring. Read more

So it seems that investors are very concerned with the uncertainties these days.

Interestingly, just about 10 days ago, Joe Mallen et al. of Helios Quantitative Research presented an interesting chart that showed a divergence between the index of economic policy uncertainty and the VIX. The authors then concluded that most investors have become desensitized to the news headlines:

It seems most investors over the years have simply become desensitized to the volume of squawking news headlines.  In more recent days, despite economic policy stories that usually cause market trepidation – such as healthcare reform (or lack thereof), the debt ceiling debate, and short term interest rate hikes to name a few – the US equity market has trended to very low levels of volatility. So, why do some investors say this environment feels so volatile, but traditional measures of volatility remain historically low?  Read more

So currently are investors oversensitive?
After the French election, will we be back to the low volatility environment again?