Financial market volatility CBOE SKEW index House price-to-rent ratio Mortgage loans to disposable income ratio
1. GENERAL ASSESSMENT OF THE MACROECONOMIC SITUATION
OECD ECONOMIC OUTLOOK, VOLUME 2017 ISSUE 1 © OECD 2017 – PRELIMINARY VERSION
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coming 12 months. Such high growth in expected earnings may, however, exaggerate the expected benefits of possible policy initiatives, including corporate tax cuts. The rise in a
widely-used metric of market valuation – the Shiller cyclically-adjusted PE ratio which discounts recent earnings developments – to its highest level since the dot-com boom is
also a worrying development.
8
Despite this, the increase in stock prices has been accompanied by low expected stock market volatility, as measured by the VIX index
Figure 1.22. Equity prices are vulnerable to downward revisions in earnings expectations, a
faster-than-expected rise in government bond yields and investor sentiment shifts. A big correction in equity prices could weigh on economic activity via wealth effects and the
financial conditions for firms though such effects appear to have weakened in recent years. Heightened financial market volatility could also spill over to other assets and
countries, with negative feedback loops. In the United States, perceived risks of a significant decline in SP500 equity prices one-month ahead, as measured by the SKEW
index, have recently risen to a record high Figure 1.22.
Buoyant house prices in some economies raise concerns about financial stability
An overreliance on very expansionary monetary policy in recent years, and the associated extended period of low interest rates, has led to vulnerabilities associated with
rising debt levels, elevated asset prices and a search for yield. Some advanced economies
8. The ratio has real equity prices in the numerator and trailing 10-year average real earnings in the denominator, and hence is still influenced by the earnings slump in the 200809 recession,
boosting the overall ratio.
Figure 1.22. Volatility has been low but perceptions of risks of large equity price declines have increased in the United States
20-day moving average
Note: The VIX measures an expected symmetric range of movements in the SP500 index over next 30 days. It is derived from options. The Merrill Lynch Option Volatility Estimate MOVE index is an equivalent of the VIX index for US treasuries. The Chicago Board Options
Exchange CBOE SKEW is an option-based measure of the perceived risk of 30-day ahead large two or more standard deviations changes in returns of the SP500. Numbers above 100 indicate a negative skew in the distribution i.e. negative tail risk. Since the standard
deviation varies over time, so does the size of expected equity price declines. Source: Thomson Reuters.
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