Benign global economic conditions and rock-bottom benchmark rates may partly
explain low financial markets volatility in recent years.
Indeed, the largest economies in the world are all growing relatively strongly. At the same time, both
factors do not necessarily lead to a low EPU. It is also important to note that the
VSTOXX measures the implied volatility of options with one month to expiry and
does not place particular weight on long-term risks. By contrast, EPU mostly
captures the longer-term concerns of economic agents.
In this respect, EPU and
the VSTOXX can deviate in the short run. What is more, low financial volatility
may suggest that markets are overly optimistic about the short-term outlook and
are underestimating the risks, including economic policy-related ones.