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February 3, 2014

The Buzz: Equity and vol market
response to EM pressure
Options Research

Global equity performance on prior EM pullbacks
EM pressure unlikely to spill over to DM
Our Global Markets team highlighted two main
channels through which EM weakness can affect
DMs:

Historical perspective: US and global
equity performance on EM pullbacks

The trade channel: gross exports to EM are a

We looked at S&P 500, VIX and global equity
performance across 19 EM equity pullbacks of 5%
or greater over the past decade.

little less than 5% of GDP for the US.

The median episode saw a 12% fall in EM
equities and a 6% fall in the S&P 500.

Across global equity indices, Russia, China
and Brazil have tended to be hit the hardest.

In the current decline MSCI EM is down 5%
and the S&P is down 3.6%.

The financial channel: US banking
exposures account for 5.5% of total banking
assets when looking at EM overall and 1.9%
when looking at the most troubled countries.

Neither channel seems large enough to create a
sustained impact on the US in our view.

The volatility response has been strong
Two of the largest ytd shifts in implied vol have
come from Turkey and Brazil (EWZ) with moves of
+11 and +7 vol pts, respectively. SPX 1m implied
vol is up +4 vol pts and VIX +5. The SPX vol move
appears high given the weak links between EM
and the US across trade and banking channels.
Low liquidity in many EM assets may be the
reason, as investors may prefer to use DM
markets as hedging tools during periods of stress.

Krag Gregory, Ph.D.
(212) 357-3770 krag.gregory@gs.com
Goldman, Sachs & Co.

Jose Gonzalo Rangel
(212) 357-6538 josegonzalo.rangel@gs.com
Goldman, Sachs & Co.

YTD SPX move > median 1m drawdown
To get a better understanding of how the recent
decline in the S&P 500 compares from an
historical perspective, we look at S&P 500 peaktrough declines back to 1960. The median SPX
drawdown over a 2-week period has been -2%,
and -3% over a 1-month period. The max
drawdown on the S&P 500 since its 2014 high of
1848.4 on January 15 has been -4%, a drop higher
than the median SPX drawdowns over 2-week and
1-month periods.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US
affiliates are not registered/qualified as research analysts with FINRA in the U.S. This report is intended for distribution to GS institutional clients only.

The Goldman Sachs Group, Inc.

Global Investment Research

February 3, 2014

The response of global equity markets to EM pressure
Our Global Markets team believes that continued pressure on EM assets is unlikely to spill over into DM markets on a sustained
basis. As described in the latest Global Economics Weekly, What happens in EM (mostly) stays in EM, January 29, there are two
main channels through which EM weakness can affect DMs. The first is through trade, the second is through banking and financial
links.

The trade channel: Gross exports to EM are a little less than 5% of GDP for the US; therefore trade exposures seem
manageable except under a very broad-based EM slowdown. Goldman Sachs US economist Jan Hatzius estimates that
assuming a 10% drop in overall EM import demand as a result of the recent troubles would mechanically shave 0.5
percentage points from real GDP growth1.

The financial channel: BIS data reports overall exposure of the DM banking system to EM at around US$5trn, close to 20%
of overall external positions, so DM bank exposures to key EM economies do not look too alarming. US banking exposures
are likewise quite small, accounting for 5.5% of total banking assets when looking at EM overall and 1.9% when looking at
the most affected countries (Argentina, Brazil, Russia, South Africa, Turkey, Indonesia and India).

Impact on US corporate profits: Our economists estimate that EM subsidiaries account for 5.5% of US corporate profits overall
and for 1.0% when looking only at the most troubled economies. Again, short of a very bad outcome with significant contagion
across EM and the broader global economy, this is a manageable issue in our view.

Global equity volatility response
Last week, Central Banks in Turkey, India and South Africa all hiked rates. While these shifts are helpful, it is not yet clear how much
stability the measures will provide without further action. Volatility has already broadened beyond EM. We analyze year-to-date
equity returns and shifts in implied volatility across global equity indices and US country and sector ETFs to assess the shift in
global risk sentiment (Exhibit 1).

Strongest volatility response in Turkey and EWZ: Russia, Turkey, China and Brazil top the list of ytd market declines with
returns between -11% and -8%. Two of the largest ytd shifts in implied volatility have come from Turkey and Brazil (EWZ). Both
are EMs with large current account deficits and 1m implied volatility levels have increased seven and five vol points respectively.
While the EWZ is down 12%, implieds are only up 5.4 points, so one could argue that SPX implieds have taken a larger hit given
the respective index return. SPX 1m implied vol is currently at 15.6 and has increased 4 vol points in 2014 or approximately 1-to1 relative to the spot index move.

Why is volatility up so much in the US? As we saw last June, periods of extreme pressure in EM can spill over to DM markets
on a day-by-day basis. One line of reasoning is due to liquidity. Given low liquidity in many EM asset classes, investors may use
DM markets as hedging tools during times of stress or because pressure to reduce risk more generally forces selling of more
liquid assets. As we highlighted in last week’s edition of The Buzz, S&P 500 1m skew has been well bid and VIX open interest
and volume has been higher than one might expect given the low direct links between EM and DM trade and banking channels.

1

US Economic Analyst, “A pothole for GDP growth”, January 31, 2014.

Goldman Sachs Global Investment Research

2

February 3, 2014

Exhibit 1: Year-to-date moves across global equity markets.
The graphs below show 1m 50 delta implied volatility. As of January 31, 2014.

Where are we now? Current level of 1m implied volatility.

Country Equity Indices

44
39

35

34 34

34
29

26 26

24

17

1y Low

Return (%)

19
15

15

RDXUSD

31 31 31

29

29
26

23 23

21 21

19
14

1y High

40

40

20 20

18 18

17 17 17
12 13 11

9
4

25

24

28

28

25

23

12

11

9

10

12

12 12

Current 1m implied volatility

39

38
32

34
29

34

35

33

25

30
24

23

10

9

9

8

9

15

13

30

15

30
27

25

25

23
19

12

13

18

13

15

12

18

19
18

17

13
12
10

4

HSCEI

-9

12

11

17

10

17

12

16

11

15

11

18

17

14

13

8

2
3

-4

2

-4

5

FTSE 100

-4

5

NIFTY

-3

STOXX50E

-3

S&P/ASX 200

-3

Russell 2000

-3

5

DAX

-3

5

NASDAQ 100

-2

STOXX 600

-2

TWSE

-2

IBEX 35

0

S&P TSX 60

0

2

+2

2

-4

Korea (EWY)

-9

4

Emerging (EEM)

-9

4

4

Mexico (EWW)

-8

Hong Kong (EWH)

-7

Japan (EWJ)

-7

1
2

-6

2

-4
-12

1

-8

2

-4

0

4

8

12

Sector ETFs
4

Return (%)

3

3
6
3

0

4

Canada (EWC)

-6

4

Energy (XLE)

-6

3

Staples (XLP)

-5

4

Materials (XLB)

-5

4

Industrials (XLI)

-4

5

+1

Utilities (XLU)
12

4
2

-3

Health Care (XLV)

8

4

-4

Tech (XLK)

4

1m Impl Vol Chg.

Cons. Discr. (XLY)

Financials (XLF)
5

8

-8

-10

Taiwan (EWT)

S&P 500

-12

China (FXI)

4

-5

FTSE MIB

5

3

-8

Kospi 200

-12

7

-8

Hang Seng

12

1y Low

32

26

19

17

1y High

33

27

24

14

34

-9

Bovespa

Brazil (EWZ)

4

Turkey

1m Impl Vol Chg.

Return (%)

1m Impl Vol Chg.

-11

Nikkei 225

17 16 16 15
15 14
14

Country and US sector ETFs
44

Country ETFs

Global Equity Indices

Current 1m implied volatility

42
40 39

Moves: Dec 31, 2013 - Jan 31, 2014

Moves: Dec 31, 2013 - Jan 31, 2014

+3 0
-10

-5

0

5

10

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

3

February 3, 2014

Exhibit 2: Implied volatility response versus year-to-date equity returns across global indices.
X axis = ytd equity return (local currency); Y axis = change in 1m 50 delta implied volatility. As of January 31, 2014.

8
7

XU030

y = -0.06x + 3.53
Euro Stoxx 600

1m implied volatility shift

6

RUT
DAX
FTSE 100
SPX Euro Stoxx 50

5
RDXUSD

4

N225
EEM

NDX
HSI ASX 200 TWSE

HSCEI

3

IBEX

TSE60

2

Bovespa

FTSE MIB

Kospi 200
NIFTY

1
0
-12

-10

-8

-6

-4
-2
YTD return (%)

0

2

4

Source: Goldman Sachs Global Investment Research.

Perspective: Avg VIX level of 14.2 in January 2014 = avg over calendar year 2013
For all of the talk about heightened levels of volatility, the market is only down -3.6% from its closing high. S&P 500 realized
volatility over the month of January was 12.6 (a whopping 1.6 vol points above the full year realized volatility of 11 over 2013) and
the average VIX level in January was 14.2, the exact level of the average VIX level in 2013. But all of these statistics mask an increase
in volatility over the back-half of the month with five and ten-day realized volatility at 15, and Friday’s closing VIX level of 18.41 was
the ytd high.

Growth heals all wounds? We also think a patch of softer US data and the fall in the flash China PMI were central to the recent
market declines. EM worries may have acted as a ‘coordinating mechanism’ for investors already feeling overly exposed to cyclical
assets during a softer patch for US and global data and this week brings fresh US data including the ISM on Monday, ECB/BOE/RBA
decisions throughout the week and payrolls on Friday. While the Chinese markets are closed for the Lunar New Year Holiday,
China’s official manufacturing PMI held in at 50.5 and a solid US ISM could remove a lot of the gloom that has descended on stocks.

Goldman Sachs Global Investment Research

4

February 3, 2014

US and global equity performance during EM equity pullbacks
Our US Portfolio Strategy team examined S&P 500 performance across 19 EM equity pullbacks of 5% or greater over the past
decade in US Thematic Views: EM pullbacks and the S&P 500, January 29, 2014. We extend the analysis to include VIX and global
equity performance. Exhibit 3 shows the performance of the MSCI EM index in local currency terms since 2004, excluding the
financial crisis. The median episode saw a 12% fall in EM equities accompanied by a 6% fall in the S&P 500. Across global indices,
Russia, China and Brazilian equities have tended to be hit the hardest. In the current decline MSCI EM is down 5% and the S&P is
down 4%.

Exhibit 3: Russia, China and Brazil have tended to be hit the hardest during EM equity pullbacks over the last decade
Returns on MSCI EM and the other global indices are in local currency. Returns on country ETFs are in USD. Data from January 2004 to January 31, 2014.

Equity Market Moves During EM Equity Pullbacks
MSCI EM Rtn (%)
(5)
(18)
(9)
(8)
(21)
(9)
(15)
(21)
(18)
(15)
(8)
(6)
(10)
(13)
(6)
(24)
(8)
(12)
(13)
(12)
(5)

S&P Rtn (%)
(3)
(5)
(6)
(2)
(8)
(6)
(6)
(15)
(25)
(25)
(5)
(5)
(8)
(10)
3
(14)
(10)
(8)
9
(6)
(4)

VIX Chg
3
5
3
0
12
9
13
11
33
14
1
7
9
18
4
21
10
11
4
9
5

Median equity return during EM equity pullbacks over the past
decade (local currency)
Brazil (EWZ)
China (FXI)
Emerging (EEM)
Korea (EWY)
Taiwan (EWT)
Mexico (EWW)
Canada (EWC)
Hong Kong (EWH)
Japan (EWJ)

Mar-04
Mar-04
Apr-04
May-04
Mar-05
Apr-05
Oct-05
Oct-05
May-06
Jun-06
Feb-07
Mar-07
Jul-07
Aug-07
Oct-07
Jan-08
Nov-08
Nov-08
Jan-09
Mar-09
Jun-09
Jun-09
Oct-09
Nov-09
Jan-10
Feb-10
Apr-10
May-10
Jan-11
Feb-11
Apr-11
Oct-11
Oct-11
Nov-11
Mar-12
Jun-12
Jan-13
Jun-13
19 epsiode median
Dec-13
Jan-14

Days
23
35
53
15
35
11
25
85
16
55
22
15
28
46
51
182
28
82
173
35
31

RDXUSD
HSCEI
Bovespa
XU030
Hang Seng
TWSE
NIFTY
FTSE MIB
Nikkei 225
Kospi 200
IBEX 35
Russell 200
DAX
TOPIX
FTSE 100
STOXX50E
NASDAQ 100
STOXX 600
S&P TSX 60
S&P/ASX 200
S&P 500

Dates

5
2

0
-5

-3
-5
-8

-10

-9
-11

-15
-20

-9
-14 -14

-16
-18

-13

-12 -11

-4

0

-4

0
-2

-3 -3

-3

-2 -2

-7

-3 -4

-4

-6
-6
-7 -7
-9 -8 -8 -8 -8 -8
-8
-9 -9
-10 -10 -10

-6
-10

-9 -9

-12
-15 -15

Median move
Current ytd move

-8

-7

-6

-11 -11
-14 -14

-13

-19

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

5

February 3, 2014

A deeper dive into tail moves: Distributional characteristics of S&P 500 max drawdowns
In this section we look more broadly at past S&P 500 peak-trough declines, in order to get a better understanding of how the recent
drop in the S&P 500 compares from an historical perspective. Using daily rolling data, we define a max drawdown to be the largest
peak-to-trough decline experienced when holding an asset over a specific time interval (Exhibit 4).

Historical perspective: Back to 1960, the median S&P 500 drawdown over a one-week period has been -1%. That is 1/3rd of the
median drawdown over a one-month period and about 1/7th of the median drawdown over a six-month period. We found
similar numbers over the more recent sample from 1990-present.

Current episode: The max drawdown on the S&P 500 since its 2014 high of 1848.4 on January 15 has been -4% based upon
closing levels from peak to local trough, a larger decline than the median SPX drawdown over past 2-week and 1-month periods.

Whereas the drawdown analysis only focuses on negative returns, exhibit 5 broadens the study and looks at the entire S&P 500
return distribution over different windows. For example, on a daily rolling basis the median one-month return on the S&P 500 is
about 1.1% and a bottom decile return is -4.6%, slightly lower than the S&P 500 decline in January.

Exhibit 4: Distributional characteristics of S&P 500 peak-to-trough max drawdowns.
Data from January 1960 to January 31, 2014.
Stats
25 %-ile
Median
75 %-ile

Drawdown Statistics from 1960 to January 2014
1-day 1-week 2-week 1-month 3-months 6-months
-0.43
-1.98
-3.16
-4.91
-8.70
-11.75
0
-1.03
-1.82
-3.08
-5.63
-7.70
0
-0.43
-0.96
-1.81
-3.93
-5.49

0%
(1)%

Std Dev

(4)%
(6)%

75 %-ile

(2)%

-0.43
‐0.43
0.43

-1.98 Median
‐3.00
0.95

(3)%-4.91

‐7.99
1.83
25 %-ile

-8.70
‐14.32
3.07
(6)%

-11.75
‐19.44
4.05
(8)%

(8)%
(10)%
(12)%

-18.64
‐29.28
8.01

(2)%

Maximal Drawdown

Maximal Drawdown

(2)%

0%

Median

(4)%

10.57
0.63
‐20.50

(3)%

25 %-ile

(6)%

(6)%
(8)%

(8)%
(10)%
(12)%

S&P 500 maximal drawdown

(14)%

Drawdown Statistics from 1990 to January 2014
1-day 1-week 2-week 1-month 3-months 6-months
-0.47
-2.24
-3.46
-5.08
-9.25
-12.56
0
-1.14
-2.01
-3.22
-5.60
-7.64
0
-0.51
-1.10
-1.91
-4.02
-5.48
0.72
1.70
3.44
5.74
7.84
0.72
0.56
0.22
0.14
0.19
75 %-ile
(1)% ‐0.72
‐2.85
‐6.66
‐11.34
‐15.48
(2)%

Stats
25 %-ile
Median
75 %-ile
Std Dev

S&P 500 maximal drawdown

(14)%
1-week

2-week

1-month
Investment Horizon

3-months

6-months

1-week

2-week

1-month

3-months

6-months

Investment Horizon

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

6

February 3, 2014

Exhibit 5: Distribution of S&P 500 returns.
The table on the right shows distributional features of SPX overlapping returns at different frequencies. Data from January 1990 to January 31, 2014.

Distribution of Monthly SPX Overlapping Returns
(1990-Present)

25%

S&P 500 Return Distributions 1990-Present
Stats
1d
5d
10d
1m
Min
-9.0
-18.3
-25.9
-30.0
5 %-ile
-1.8
-3.7
-4.8
-6.9
10 %-ile
-1.2
-2.6
-3.3
-4.6
25 %-ile
-0.5
-1.0
-1.3
-1.7
Median
0.1
0.3
0.5
1.1
Average
0.0
0.2
0.3
0.7
75 %-ile
0.6
1.5
2.1
3.3
90 %-ile
1.2
2.7
3.7
5.4
95 %-ile
1.7
3.7
5.0
7.1
Max
11.6
19.1
21.6
23.4

Frequency (%)

20%

15%

10%

5%

(%)
3m
-41.8
-11.9
-7.7
-1.6
2.7
2.1
6.7
10.1
13.1
38.8

22 - 24

18 - 20

14 - 16

10 - 12

6-8

2-4

(2) - 0

(6 ) - (4)

(10 ) - (8)

(14 ) - (12)

(18 ) - (16)

(22 ) - (20)

(26 ) - (24)

(30) - (28)

0%

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

7

February 3, 2014

Cross Asset Risk Barometer: EM credit spreads and FX implieds remain elevated
Exhibit 6: Outside Japan, 1m implieds remain below median levels across global indices. Credit spreads and FX 1m implieds are mixed. Commodity 1m implieds
remain low.
Data: January 2, 2007 – January 31, 2014. Spanish and Italian 10y bond spreads in the table below refer to the spreads versus 10y German bonds. In the bar graph below
we benchmark changes relative to December 31, 2013.

1y
Peak
39.0
39.0
20.1
27.1
20.5
23.7
22.2
32.1
18.7
19.6
22.6
19.7
22.4
34.7
32.1
19.2
33.6
25.7
30.9
29.4
16.9
20.7
17.5
25.5

Overall
Peak
88.8
92.3
68.0
77.3
80.9
75.8
81.5
70.1
72.2
75.9
73.4
74.1
78.4
113.8
108.6
66.9
95.4
110.2
161.7
100.7
83.0
86.6
67.0
87.1

% to
Peak
245
282
356
234
339
284
350
226
363
393
303
354
299
400
373
391
345
566
529
553
618
506
439
380

Curr
Peak Date %-ile
27-Oct-08 70
27-Oct-08 64
16-Oct-08 42
27-Oct-08 41
20-Nov-08 41
16-Oct-08 38
10-Oct-08 38
16-Oct-08 38
20-Nov-08 38
16-Oct-08 34
16-Oct-08 31
20-Nov-08 30
20-Nov-08 29
27-Oct-08 27
24-Oct-08 26
28-Oct-08 24
27-Oct-08 23
27-Oct-08 19
26-Nov-08 19
27-Oct-08 11
13-Oct-08
8
29-Oct-08
8
28-Oct-08
7
31

Low - Risk Aversion - High

Current %-ile
(Since Jan. 2007)

Since January 2007

Index
Current
340
EEMCDS
I iTraxx Asia ex Jap.
150
I Italy 10y Bond Spr.
221
210
SSpain 10y Bond Spr.
I iTraxx Senior Fin.
102
82
EEU IG CDX 5y
I US IG CDX 5y
71
HUS HY CDX 5y
351
316
EEU XO CDX 5y
57
SSovX WE 5y

Chg
(1w)
-1.5
2.8
-2.2
-1.5
-3.5
-2.3
-1.0
-0.3
0.0
1.1

1y
Peak
378
171
348
385
200
133
98
478
528
108

Overall % to
Curr
Peak
Peak Peak Date %-ile
1022
201 23-Oct-08
86
650
334 24-Oct-08
66
552
150 9-Nov-11
65
633
202 24-Jul-12
58
361
256 25-Nov-11 35
217
164 5-Dec-08
23
283
296 20-Nov-08 14
1674
377 9-Mar-09
11
1158
266 5-Mar-09
10
387
578 25-Nov-11
5

FX Vol vs. USD (1m Implied)
18.1
12.5
13.7
8.3
10.7
11.4
9.3
8.6
7.2
7.1

ZZAR
MMXN
BBRL
KKRW
uAUD
uNZD
JJPY
CCHF
uGBP
uEUR

2.5
0.1
0.1
0.5
0.4
0.4
-0.7
0.5
0.1
0.5

20.1
17.6
18.7
13.3
15.2
15.8
17.5
12.5
9.8
10.0

70.0
74.9
75.0
75.4
47.8
42.8
37.3
25.3
30.8
28.8

287 23-Oct-08
502 22-Oct-08
447 23-Oct-08
813 24-Oct-08
346 27-Oct-08
275 27-Oct-08
299 27-Oct-08
193 18-Dec-08
329 27-Oct-08
306 30-Oct-08

67
59
51
35
33
31
26
25
25
16

30.0
27.2
31.9

60.0
83.6
117.4

281
427
493

25
5
5

Commodity Vol (1m Implied)
0

25

50
75
Curr %-ile

Gold
100 Copper
WTI

15.8
15.9
19.8

1.0
2.1
1.2

29-Oct-08
31-Oct-08
14-Jan-09

Low - Risk Aversion - High

0

25

50

75

100

0

25

50

75

100

50
75
Curr %-ile

100

0

50
40

37 37 36
34 33
32

30
20
10

EUR

CHF

JPY

BRL

AUD

MXN

KRW

SovX WE 5y

Spain 10y Bond Spr.

Italy 10y Bond Spr.

EU XO CDX 5y

US IG CDX 5y

US HY CDX 5y

iTraxx Senior Fin.

EU IG CDX 5y

iTraxx Asia ex Jap.

EMCDS

NIFTY

Bovespa

MIB

KOSPI 200

HSCEI

TOPIX

43 42

ZAR

FX and Commodity Implied Volatility (1m)

Credit

EEM

Nikkei 225

RDXUSD

Hang Seng

IBEX

SMI

S&P/TSE 60

Nasdaq 100

EuroStoxx 50

ASX 200

Russell 2000

VIX

CAC40

TWSE

DAX

S&P 500

FTSE 100

% Change since December 31, 2013

Equity Implied Volatility (1m)

25

Gold

Chg
(1w)
3.5
3.3
1.2
0.3
0.3
1.7
1.9
1.7
1.1
2.2
1.7
0.9
2.6
2.1
1.3
2.1
-0.5
2.5
3.8
0.4
1.1
1.4
2.6
1.7

Credit Metrics (Levels)

Copper

Index
Current
Nikkei 225
25.7
TOPIX
24.1
Switzerland
14.9
Spain (IBEX)
23.2
VIX
18.4
Euro Stoxx 50
19.7
Germany (DAX)
18.1
Italy (MIB)
21.5
S&P 500
15.6
UK (FTSE 100)
15.4
France (CAC)
18.2
NDX
16.3
Russell 2000
19.6
China (HSCEI)
22.8
Em. Mkts. (EEM) 23.0
Australia
13.6
Bovespa
21.4
Hang Seng
16.6
Russia
25.7
India (NIFTY)
15.4
Canada
11.6
KOSPI 200
14.3
Taiwan
12.4
Average
18.6

Current %-ile
(Since Jan. 2007)

Since January 2007

WTI

Equity Vol (1m Implied)

38 38
29 27
27 26 25

21 20 20 20
18

24
15 13
13

17 17 16
15 14
10

8

22
10

9
3

13

8
1

0
-10
-20

-5

-1
-7

-2
-8

-13

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

8

February 3, 2014

Skew View: Highest in the US on both an absolute and percentile rank basis
Exhibit 7: Russell 2000 and S&P 500 one-month skew are highest on an absolute and percentile basis, RDXUSD and FTSE MIB are lowest
Normalized skew: (25 delta put – 25 delta call) / 50 delta implied volatility. Percentiles are calculated using data from January 2, 2007 – January 31, 2014.
Global
Indices

Option Volatility
(1m Implied)

1m Skew: Current %-ile
(Since Jan. 2007)

Option Skew
(Norm. 1m 25 delta)

1m Imp Chg Curr Skew Curr Overall Peak
% to
Current (1w) %-ile Current %-ile Peak
Date
Peak
Russell 2000
19.6
2.6
29
0.31
83
0.41
8/11/11
32
S&P 500
15.6
1.1
38
0.35
83
0.48
5/21/10
37
China (HSCEI)
22.8
2.1
27
0.17
78
0.37
8/9/11
122
Hang Seng
16.6
2.5
19
0.20
77
0.38
8/8/11
90
UK (FTSE 100)
15.4
2.2
34
0.30
76
0.46
8/10/11
56
France (CAC)
18.2
1.7
31
0.28
75
0.40 10/17/08 45
Australia
13.6
2.1
24
0.28
75
0.53
12/1/08
90
TOPIX
24.1
3.3
64
0.19
62
0.50
3/17/11 160
Nikkei 225
25.7
3.5
70
0.19
61
0.55
3/17/11 185
EuroStoxx 50
19.7
1.7
38
0.25
59
0.39 10/16/08 60
Germany (DAX)
18.1
1.9
38
0.25
58
0.39
8/15/07
54
Taiwan
12.4
2.6
7
0.13
46
0.55
8/16/07 330
NDX
16.3
0.9
30
0.24
40
0.43
5/21/10
82
KOSPI 200
14.3
1.4
8
0.14
26
0.48
8/19/11 251
Switzerland
14.9
1.2
42
0.20
23
0.38 10/17/08 93
Canada
11.6
1.1
8
0.21
21
0.46
11/8/11 118
India (NIFTY)
15.4
0.4
11
0.14
16
0.40
2/21/07 179
Spain (IBEX)
23.2
0.3
41
0.15
12
0.42 11/13/08 170
Bovespa
21.4
-0.5
23
0.13
11
0.42 10/30/08 220
Italy (MIB)
21.5
1.7
38
0.13
6
0.40 10/17/08 206
Russia
25.7
3.8
19
0.10
6
0.32 11/17/11 203
Average
18.4
1.8 30.4
0.21
47
0.43
133

Low - Risk Aversion - High

0.35

Option Volatility
(1m Implied)

1m Skew: Current %-ile
(Since Jan. 2007)

Option Skew
(Norm. 1m 25 delta)

1m Imp Chg Curr Skew Curr Overall Peak % to
Index
Current (1w) %-ile Current %-ile Peak
Date Peak
17.8
0.4
20
0.22
67
0.44 08/11/11 103
XXLF (Financials)
XXLE (Energy)
17.6
2.4
14
0.22
64
0.44 12/11/07 104
17.3
0.9
29
0.27
61
0.53 08/16/07 96
XXLI (Industrials)
13.9
1.3
58
0.26
44
0.46 08/24/07 75
XXLP (Staples)
16.9
0.1
14
0.21
43
0.41 08/24/07 90
XXLB (Materials)
12.9
-0.6
29
0.19
30
0.68 04/26/07 254
XXLU (Utilities)
1.5
29
0.21
16
0.50 08/01/07 137
XXLY (Discretionary) 16.4
16.9
1.7
63
0.19
10
0.45 05/17/07 135
XXLV (Healthcare)
15.1
0.1
23
0.18
9
0.44 10/29/08 139
XXLK (Tech)
Average
16.1
0.9
31
0.22
38
0.48
126

0

EEWC (Canada)
EEWH (Hong Kong)
EEEM (Emer. Mkts.)
FFXI (China)
EEWY (Korea)
EEWJ (Japan)
EEWT (Taiwan)
EEWZ (Brazil )
Average

0

Low - Risk Aversion - High

25

50

25

50

75

100

75

100

International ETFs

0

25
50
Vol %-ile

13.3
15.3
23.0
24.5
23.1
19.4
17.7
27.3
20.4

1.1
0.5
1.3
0.6
1.9
2.8
2.0
1.0
1.4

8
11
26
32
28
44
12
34
24

0.30
0.20
0.23
0.15
0.17
0.12
0.13
0.15
0.18

95
59
54
48
31
22
15
10
42

0.46
0.46
0.42
0.34
0.45
0.58
0.55
0.44
0.46

6/19/12
8/15/12
8/11/11
5/21/10
12/11/07
7/17/09
2/16/07
8/11/11

52
125
81
121
169
382
321
201
182

Vol %-ile

75
100
Skew %-ile

Skew %-ile

1m Normalized Skew

0.45
0.40

US Sector
ETFs

Global Indices
0.31 0.30

0.30

0.28 0.28

0.25

Sectors

Country ETFs

0.35
0.30
0.25 0.25
0.24

0.20

0.27 0.26
0.21 0.20 0.20
0.19 0.19

0.15

0.23
0.17 0.15
0.14 0.14 0.13 0.13 0.13

0.22 0.22 0.21 0.21

0.20
0.17 0.15
0.15

0.10

0.13

0.19 0.19 0.18

0.12

0.10
0.05
XLK (Tech)

XLV (Healthcare)

XLU (Utilities)

XLY (Discretionary)

XLB (Materials)

XLF (Financials)

XLE (Energy)

XLP (Staples)

XLI (Industrials)

EWJ (Japan)

EWT (Taiwan)

EWZ (Brazil )

FXI (China)

EWY (Korea)

EWH (Hong Kong)

EEM (Emer. Mkts.)

EWC (Canada)

Russia

Taiwan

Italy (MIB)

Bovespa

KOSPI 200

India (NIFTY)

Spain (IBEX)

Nikkei 225

China (HSCEI)

TOPIX

Switzerland

Hang Seng

NDX

Canada

EuroStoxx 50

Germany (DAX)

France (CAC)

Australia

Russell 2000

UK (FTSE 100)

S&P 500

0.00

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

9

February 3, 2014

Exhibit 8: SPY normalized skew (3m)

Exhibit 9: IWM normalized skew (3m)

Exhibit 10: QQQ normalized skew (3m)

As of January 31, 2014 market close. Normalized
skew: (25 delta put–25 delta call) / 50 delta implied vol.

As of January 31, 2014 market close. Normalized
skew: (25 delta put–25 delta call) / 50 delta implied vol.

As of January 31, 2014 market close. Normalized
skew: (25 delta put–25 delta call) / 50 delta implied vol.

0.33

0.28

0.23
Jan-13

Apr-13

Jul-13

Oct-13

0.34

0.31

0.28

0.25
Jan-13

Jan-14

QQQ normalized skew (3m)

0.38

IWM normalized skew (3m)

SPY normalized skew (3m)

0.32

Apr-13

Jul-13

Oct-13

Jan-14

0.28

0.24

0.20
Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Source: Goldman Sachs Global Investment Research.

Source: Goldman Sachs Global Investment Research.

Source: Goldman Sachs Global Investment Research.

Exhibit 11: Euro Stoxx 50 normalized skew (3m)

Exhibit 12: EEM normalized skew (3m)

Exhibit 13: HSCEI normalized skew (3m)

As of January 31, 2014 market close. Normalized
skew: (25 delta put–25 delta call) / 50 delta implied vol.

As of January 31, 2014 market close. Normalized
skew: (25 delta put–25 delta call) / 50 delta implied vol.

As of January 31, 2014 market close. Normalized
skew: (25 delta put–25 delta call) / 50 delta implied vol.
0.25

0.28

0.25

0.22

0.19
Jan-13

Apr-13

Jul-13

Oct-13

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

Jan-14

0.36

HSCEI normalized skew (3m)

EEM normalized skew (3m)

STOXX50E normalized skew (3m)

0.31

0.32
0.28
0.24
0.20
0.16
Jan-13

Apr-13

Jul-13

Oct-13

Source: Goldman Sachs Global Investment Research.

Jan-14

0.20
0.15
0.10
0.05
0.00
Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Source: Goldman Sachs Global Investment Research.

10

February 3, 2014

VIX Quicks: VIX @ 18.4, Feb to Jun VIX futures shift up ~0.2 to 1.4 vol pts.
Exhibit 14: The VVIX closed last Friday at 99.7, its highest level since Oct 2013.

Exhibit 15: The VIX term structure remains inverted.

As of January 31, 2014.

Data as of January 31, 2014.

CBOE VVIX Index
130

VIX Futures
Date
24-Jan-14
31-Jan-14
1 wk Chg
1 wk % Chg

120
110
100

S&P 500 VIX Spot Feb-14 Mar-14
1,790.3
18.1
16.2
16.2
1,782.6
18.4
17.6
17.4
-7.7
0.3
1.4
1.2
-0.4%
1.5%
8.6%
7.1%

Apr-14
16.8
17.4
0.6
3.9%

May-14 Jun-14 Jul-14
17.3
17.7
18.2
17.7
17.9
18.2
0.4
0.2
0.0
2.3%
0.8%
0.0%

Term Structure of VIX Spot and VIX Futures over Time
19

90

19
18

80

18

70

18.4
17.6
18.1

17.4

17.7

17.4

16.8

16

Jan-13

Jul-13

Jan-14

18.2

17.3

17

Jul-12

18.2

17.7

17

60
Jan-12

17.9

16.2

16

16.2

15

31-Jan-14

15

24-Jan-14

14

Exhibit 16: VIX futures across maturities.

VIX Spot

As of January 31, 2014.

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

Changes in VIX spot and futures (Jan 24 to Jan 31)

Volatility (%)

21
19
16

1.4

Jun = 17.85

Apr = 17.4
Mar = 17.35

14
11
Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

1.2

May = 17.65
0.6
0.4
0.3

0.2

Feb = 17.6
VIX = 18.41

VIX Spot

Feb-14

Mar-14

Apr-14

May-14

Jun-14

0.0
Jul-14

Source: Goldman Sachs Global Investment Research.

11

February 3, 2014

Hedging Landscape (95% Put Pricing): TWSE and S&P TSE 60 puts lowest cost globally
Exhibit 17: 1m 95% put pricing: TWSE the lowest globally.

Exhibit 18: 3m 95% put pricing: S&P TSE 60 the lowest globally.

Indicative pricing as of January 31, 2014. Pricing (% spot). Risk: the maximum loss
from buying a put is the upfront premium paid.

Indicative pricing as of January 31, 2014. Pricing (% spot). Risk: the maximum loss
from buying a put is the upfront premium paid.

TWSE
S&P/TSE 60
KOSPI 200
NIFTY
ASX 200
SMI
HSI
FTSE 100
DAX
Bovespa
Euro Stoxx 50
HSCEI
TOPIX
RDXUSD
Nikkei 225

Rank Order by Cost (% spot)

Country Indices

0.25
0.28
0.32
0.36
0.50
0.52
0.57
0.62
0.70
0.77
0.82
1.03
1.14
1.20
1.29

EWC
EWH
SPY
QQQ
EWT
EWJ
IWM
EWY
EEM
FXI
EWZ

Country ETFs

0.55
0.58
0.61
0.61
0.72
0.76
0.94
1.12
1.21
1.26
1.45

XLU
XLK
XLP
XLY
XLV
XLB
XLE
XLI
XLF

0.39

US Sector ETFs

US Sector ETFs

Country ETFs

Country Indices

Rank Order by Cost (% spot)

0.50
0.52
0.59
0.64
0.64
0.67
0.69
0.70
0.0

0.3

0.6
0.9
Cost of 1m 95% Puts (% of Spot)

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

1.2

1.5

S&P/TSE 60
KOSPI 200
TWSE
ASX 200
NIFTY
FTSE 100
DAX
HSI
SMI
Bovespa
Euro Stoxx 50
HSCEI
TOPIX
Nikkei 225
RDXUSD

1.03
1.15
1.17
1.43
1.74
1.78
1.85
1.89
1.98
1.99
2.26
2.69
2.82
3.04
3.18

EWC
SPY
QQQ
EWH
EWJ
EWT
IWM
EWY
EEM
FXI
EWZ

1.55
1.74
1.78
1.81
2.09
2.15
2.53
2.83
3.01
3.15
3.54

XLU
XLP
XLK
XLV
XLY
XLB
XLI
XLF
XLE

1.42
1.44
1.65
1.81
1.82
1.96
1.97
1.99
2.05
0

1

2
3
Cost of 3m 95% Puts (% of Spot)

4

Source: Goldman Sachs Global Investment Research.

12

February 3, 2014

Global Put Spreads: S&P TSE 60 and TWSE screen as the highest payout ratios
To screen for hedging candidates, we rank order the maximum payout ratios (maximum gain/entry cost) of 1m 97.5% /
92.5% put spreads, assuming each underlier settles below the lower put strike at expiration.
Risks: The maximum loss from buying a put spread is the upfront premium paid.
Exhibit 19: Maximum payout ratios for 1m and 3m 97.5% / 92.5% put spreads.
Payout ratios: maximum gain / entry price assuming each underlier settles below the lower put strike at expiration. Indicative pricing as of January 31, 2014.
Put Spreads 97.5% / 92.5%
Country Indices
S&P TSE 60
TWSE
KOSPI 200
NIFTY
ASX 200
FTSE 100
Hang Seng
SMI
DAX
Bovespa
Euro Stoxx 50
HSCEI
TOPIX
Nikkei 225
RDXUSD
Country ETFs
EWC (MSCI Canada)
SPY (SPDR S&P 500 ETF Trust)
EWH (MSCI Hong Kong)
QQQ (PowerShares QQQ Trust Series)
EWT (MSCI Taiwan)
IWM (iShares Trust Russell 2000 Index)
EWJ (MSCI Japan)
EEM (MSCI Emerging Markets)
EWY (MSCI Korea)
FXI  (iShares FTSE China 25 Index)
EWZ (MSCI Brazil)
US Sector ETFs
XLU (Utilities)
XLP (Staples) 
XLK (Tech)
XLY (Discretionary)
XLV (Healthcare)
XLB (Materials)
XLF (Financials)
XLI (Industrials)
XLE (Energy)

Put Strikes
Put Spread
Index Level
Strikes (% of spot)
Strikes
97.5 / 92.5
765.9 / 726.6
97.5 / 92.5
8251 / 7827.9
97.5 / 92.5
246.6 / 233.9
97.5 / 92.5
5937.3 / 5632.8
97.5 / 92.5
5060.3 / 4800.8
97.5 / 92.5
6347.7 / 6022.2
97.5 / 92.5
21484.5 / 20382.8
97.5 / 92.5
7986.6 / 7577
97.5 / 92.5
9073.8 / 8608.5
97.5 / 92.5
46448 / 44066.1
97.5 / 92.5
2938.6 / 2787.9
97.5 / 92.5
9572.9 / 9082
97.5 / 92.5
1190.1 / 1129.1
97.5 / 92.5
14541.7 / 13795.9
97.5 / 92.5
1489.8 / 1413.4

Pricing by Term
Premium (% of spot)
M ax Payout Ratios
1m
3m
1m
3m
0.45
1.06
11.1
4.7
0.52
1.24
9.6
4.0
0.56
1.10
8.9
4.5
0.57
1.19
8.8
4.2
0.65
1.14
7.7
4.4
0.71
1.30
7.0
3.8
0.73
1.43
6.8
3.5
0.74
1.64
6.8
3.0
0.81
1.25
6.2
4.0
0.87
1.33
5.7
3.8
0.89
1.46
5.6
3.4
1.02
1.59
4.9
3.1
1.06
1.72
4.7
2.9
1.14
1.74
4.4
2.9
1.23
1.78
4.1
2.8

Maximum Payout Ratios
Strategy: 1m Put Spread 97.5% / 92.5%
0

2

4

6

8

10

S&P/TSE 60
TWSE

9.6

KOSPI 200

8.9

NIFTY

8.8

ASX 200

7.7

FTSE

7.0

HSI

6.8

SMI

6.8

DAX

6.2

Bovespa

5.7

Euro Stoxx 50

5.6

HSCEI

4.9

TOPIX
Nikkei 225
RDXUSD

97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5

27.2 / 25.8
173.7 / 164.8
18.6 / 17.7
84.1 / 79.8
13.2 / 12.6
109.4 / 103.8
11.1 / 10.5
37.2 / 35.3
57.6 / 54.6
33.7 / 32
38.3 / 36.3

0.57
0.68
0.71
0.72
0.78
0.90
0.95
0.99
1.04
1.07
1.24

1.05
1.15
1.30
1.31
1.44
1.44
1.50
1.53
1.62
1.63
1.74

8.8
7.4
7.0
6.9
6.4
5.6
5.3
5.1
4.8
4.7
4.0

4.8
4.3
3.8
3.8
3.5
3.5
3.3
3.3
3.1
3.1
2.9

EWC

97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5
97.5 / 92.5

38.1 / 36.2
39.7 / 37.7
34 / 32.2
61.3 / 58.1
54.6 / 51.8
42.9 / 40.7
20.5 / 19.5
48.8 / 46.3
81.3 / 77.1

0.50
0.53
0.63
0.69
0.71
0.71
0.75
0.75
0.77

1.28
1.11
1.29
1.30
1.29
1.38
1.34
1.34
1.42

10.0
9.4
7.9
7.2
7.0
7.0
6.7
6.7
6.5

3.9
4.5
3.9
3.8
3.9
3.6
3.7
3.7
3.5

XLU

4.7
4.4
4.1
8.8

SPY

7.4

EWH

7.0

QQQ

6.9

EWT

6.4

IWM

5.6

EWJ

5.3

EEM

5.1

EWY

4.8

FXI
EWZ

4.7
4.0
10.0

XLP

9.4

XLK

7.9

XLY
XLV
XLB
XLF
XLI
XLE

12
11.1

7.2
7.0
7.0
6.7
6.7
6.5

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

13

February 3, 2014

US Volatility Landscape
Exhibit 20: 50-delta implied volatility comparison across US indices
Data as of January 31, 2014 market close.
S&P 500 (SPX)

Russell 2000 (RUT)

Nasdaq 100 (NDX)

Performance - 1 week
-1.5%

1m Vol: +1.1

1y %-ile: 96%

1m Vol: +2.6

1y %-ile: 95%

1m Vol: +0.9

1y %-ile: 96%

3m

6m

12m

24m

1m

3m

6m

12m

24m

1m

3m

6m

12m

24m

Current (31-Jan-14)

15.6

15.4

15.9

16.7

17.7

19.6

19.6

19.8

20.5

21.4

16.3

16.0

16.5

17.6

19.2

1w Chg (since 24-Jan-14)

1.1

0.8

0.6

0.6

0.3

2.6

1.8

1.1

0.5

0.2

0.9

0.4

0.1

-0.1

0.1

YTD Chg (since 31-Dec-13)
%-ile Rank (1y)

4.6

3.0

2.3

1.5

0.6

4.9

3.2

2.1

1.0

0.5

3.5

1.9

1.3

0.6

-0.1

96%

90%

88%

83%

65%

95%

90%

86%

82%

69%

96%

86%

81%

60%

43%

Current (31-Jan-14)

12.8

10.6

10.6

11.4

12.2

16.6

14.7

14.7

15.2

16.1

15.9

12.4

12.2

12.7

14.2

1w Chg (since 24-Jan-14)

1.3

0.5

0.2

0.1

0.0

2.7

0.8

0.4

0.2

0.0

2.1

0.9

0.4

0.2

0.1

YTD Chg (since 31-Dec-13)

3.1

0.2

0.8

0.3

0.1

3.0

0.1

1.0

0.6

0.1

6.7

0.5

1.0

0.2

0.2

73%

25%

12%

18%

10%

76%

45%

36%

54%

11%

89%

41%

17%

12%

10%

Current (31-Jan-14)

2.8

4.8

5.2

5.3

5.6

3.1

4.9

5.2

5.2

5.4

0.4

3.6

4.3

4.9

4.9

1w Chg (since 24-Jan-14)

-0.2

0.3

0.4

0.5

0.3

-0.1

1.0

0.7

0.3

0.2

-1.2

-0.4

-0.2

-0.3

0.0

YTD Chg (since 31-Dec-13)

1.5

2.8

1.5

1.3

0.4

1.8

3.0

1.1

0.4

0.4

-3.2

1.4

0.3

0.4

-0.2

66%

96%

100%

95%

99%

69%

95%

98%

80%

98%

40%

88%

93%

95%

92%

Current (31-Jan-14)

0.35

0.37

0.38

0.37

0.34

0.31

0.34

0.33

0.33

0.33

0.24

0.26

0.25

0.26

0.26

1w Chg (since 24-Jan-14)

-0.02

0.00

0.01

0.01

0.00

-0.04

-0.02

-0.01

0.00

-0.01

-0.01

-0.01

0.00

0.00

0.01

YTD Chg (since 31-Dec-13)
%-ile Rank (1y)

0.08

0.05

0.03

0.00

0.00

0.06

0.02

-0.01

-0.03

-0.03

0.05

0.02

0.01

0.01

0.01

86%

88%

83%

71%

31%

86%

90%

57%

53%

40%

58%

47%

18%

6%

8%

-1.0%

0.0%

-1.2%
-0.6%

1m Vol Stats

Implied Volatility

-0.5%
-0.4%

3m Vol Stats

SPX

RUT

NDX

SPX

RUT

NDX

16

20

16

15

20

16

17

16

15

12

96%

95%

88%

88%

90%

Impl Vol
(%)

1m

SPX
RUT
NDX

Realized Volatility

11

Implied vs Realized

86%

31-Jan
24-Jan

Implied Volatility (%)

Chart Legend

17

24

1m-6m: -0.3 (97%-ile)
1m-12m: -1.1 (98%-ile)
16

15

15

15
14
13

14

15

16

15

16

18
17
17

16

16

22
20

20

19

20

18
16

20

17

21
20
21

19
17

20

20

20

22

14

11

14

12

9

12

10

1m

2m

3m

6m

9m 12m 24m

1m

2m

3m

6m

19
16

16

16

16

18

9m 12m 24m

1.5

20
18

15

15

16

17
16

17
17

58%

47%

YTD 1m Vol Change (1 = 31-Dec-12)

1m-6m: -0.2 (98%-ile)
1m-12m: -1.2 (98%-ile)

24

1m-6m: -0.2 (97%-ile)
1m-12m: -0.8 (98%-ile)

86%

Skew
1y %-ile

19

69%
40%

Normalized Skew*

Term Structure

Impl - Rlzd
1y %-ile

%-ile Rank (1y)

66%

Rlzd Vol
(%)

%-ile Rank (1y)

13

SPX: 1.42

RUT: 1.33

NDX: 1.27

1.4
1.3

18
19
18

1.2
1.1
1.0
0.9

1m

2m

3m

6m

9m 12m 24m

0.8
31-Dec 5-Jan

10-Jan 15-Jan 20-Jan 25-Jan 30-Jan

* Normalized skew: (25 delta put - 25 delta call)/ 50 delta

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

14

February 3, 2014

Global Volatility Landscape

Exhibit 21: 50-delta implied volatility comparison across global indices.
Data as of January 31, 2014 market close.

ATM Implied Volatility
Realized Volatility

1m Implied Volatility

Level

1w Chg

1y
%-ile

90%

4.8

16.7

+0.6

83%

5.3

+1.8

90%

4.9

20.5

+0.5

82%

5.2

16.0

+0.4

86%

3.6

17.6

-0.1

60%

4.9

18.6

+0.8

74%

4.4

18.8

-0.1

30%

2.5

15.0

+1.1

85%

5.2

15.7

+0.5

65%

3.5

Level

1w Chg

1y
%-ile

95%

2.8

15.4

+0.8

+2.6

95%

3.1

19.6

16.3

+0.9

96%

0.4

19.7

+1.7

90%

4.7

+2.2

90%

5.1

1m

3m

6m

12m

Level

1w Chg

1y
%-ile

S&P 500

12.8

10.6

10.6

11.4

15.6

+1.1

Russell 2000

16.6

14.7

14.7

15.2

19.6

Nasdaq 100

15.9

12.4

12.2

12.7

EuroStoxx 50

15.0

14.2

13.7

16.3

FTSE-100

10.3

9.8

10.1

12.2

15.4

Implied

Realized

12m Implied Volatility
Less
Rlzd

Less
Rlzd

Index

Performance

3m Implied Volatility
Implied

Realized

Implied

Less
Rlzd

Realized

DAX

14.1

12.7

12.3

14.8

18.1

+1.9

91%

4.0

17.2

+1.0

81%

4.5

17.4

+0.5

52%

2.7

Nikkei 225

25.9

22.0

23.5

27.4

25.7

+3.5

68%

-0.1

24.0

+1.7

55%

2.0

22.3

+0.7

50%

-5.1

TOPIX

23.0

17.7

20.1

24.3

24.1

+3.3

52%

1.2

22.6

+1.6

34%

4.9

21.2

+0.6

36%

-3.0

KOSPI 200

14.5

13.4

12.5

13.7

14.3

+1.4

50%

-0.2

15.0

+0.8

47%

1.5

16.1

+0.4

27%

2.4

Hang Seng

12.2

11.7

11.8

13.8

16.6

+2.5

78%

4.4

17.6

+1.5

87%

6.0

18.5

+0.6

85%

4.7

MSCI EEM

22.0

19.0

19.7

19.3

23.0

+1.3

86%

1.0

23.0

+0.9

88%

4.0

22.5

+0.2

68%

3.2

Bovespa

16.8

17.7

20.1

20.7

21.4

-0.5

44%

4.6

20.6

-0.7

37%

2.9

20.5

-0.2

40%

-0.2

S&P/TSE 60

11.0

9.1

9.3

10.7

11.6

+1.1

59%

0.5

11.4

+0.3

25%

2.2

13.7

+0.1

19%

3.0

NIFTY

13.0

14.7

20.4

18.3

15.4

+0.4

32%

2.4

20.1

+2.7

79%

5.4

24.3

+0.8

90%

6.0

MSCI EAFE

10.2

10.2

10.6

12.4

16.2

+2.6

80%

6.1

15.8

+1.4

63%

5.6

17.2

+0.6

28%

0

10

20

30

40

0

50

5
S&P/TSE 60

KOSPI 200

S&P 500

FTSE-100

MSCI EAFE

DAX

Nasdaq 100

Hang Seng

Russell 2000

EuroStoxx 50

NIFTY

TOPIX

Bovespa

Nikkei 225

0

1w Change in 1m Implied Vol (%)

10

-0.6%
-0.5%
-2.3%
-0.9%
-3.1%
-3.5%

0.0%
-1.4%
-0.1%
-0.3%
-0.3%
-2.8%

10

20

30

40

-2.3%
-4%

50

-2%

0%

1m Implied Vol Change vs. Performance

Bovespa

15

S&P/TSE 60

15

MSCI EEM

15

11

MSCI EEM

50

Nasdaq 100

16

15

KOSPI 200

16

40

EuroStoxx 50

17

DAX

18

S&P 500

19

TOPIX

20

20

Nikkei 225

20

FTSE-100

21

Hang Seng

23

MSCI EAFE

23

30

16%
14%
14%
12%
9% 9%
8%
10%
7% 7% 7%
8%
6% 5%
5%
6%
4% 4%
3% 2%
4%
2%
0%
-2%
-4%
-3%
-6%
NIFTY

24

% Implied Volatility Change

Implied Volatility (%)

25

20

-0.4%
-1.2%

4.8
0

1w % Change in 3m Implied Volatility

30

Russell 2000

3m Implied Volatility Level

10

1w Return (%)

4.0
3.5

TOPIX

Nikkei 225

3.0

MSCI EAFE

Hang Seng

2.5

Russell 2000
DAX

FTSE-100

2.0
1.5

EuroStoxx 50
S&P/TSE 60

1.0
0.5

S&P 500
Nasdaq 100

NIFTY

0.0

Bovespa

-0.5
-1.0
-4.0%

MSCI EEM
KOSPI 200

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

1w Index Return (%)

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

15

February 3, 2014

The Correlation Connection: SPX 1m realized correlation, 34th %-ile vs a 5y history
Exhibit 22: S&P 500 implied and realized correlation across maturities.
5y history through January 31, 2014 market close.

0.90

S&P 500: Implied and Realized Correlation

S&P 500 1m realized correlation at 34th %-ile

Implied

0.80

Current
5y %-ile
1m ago
1m Chg
Min
25 %-ile
Median
75 %ile
Max

0.70
0.60
0.50
0.40
0.30
0.20

3m
0.41
0.14
0.34
0.07
0.30
0.44
0.49
0.54
0.74

Realized
12m
0.47
0.10
0.43
0.04
0.41
0.50
0.53
0.59
0.70

24m
0.51
0.12
0.51
0.01
0.46
0.53
0.55
0.60
0.71

1m
0.33
0.34
0.31
0.02
0.10
0.29
0.39
0.50
0.83

3m
0.28
0.05
0.29
-0.01
0.22
0.32
0.38
0.47
0.75

6m
0.28
0.02
0.25
0.02
0.24
0.33
0.38
0.54
0.70

12m
0.28
0.01
0.30
-0.01
0.27
0.37
0.46
0.53
0.61

24m
0.31
0.00
0.34
-0.03
0.31
0.46
0.49
0.51
0.57

S&P 500 Realized Correlation

S&P 500 Implied Correlation

0.9

6m
0.44
0.12
0.38
0.06
0.35
0.48
0.52
0.57
0.72

Nov-13

Aug-13

May-13

Feb-13

Nov-12

Aug-12

May-12

Feb-12

Nov-11

Aug-11

May-11

Feb-11

Aug-10

May-10

0.10

Nov-10

S&P 500 1m Implied Correlation
S&P 500 1m Realized Correlation

1m
0.37
0.24
0.29
0.09
0.21
0.38
0.45
0.53
0.79

0.8
0.7

Correlation

0.6
0.5
0.4
0.3
0.2

25-75 %-ile

Max

Min

1w Ago

Current

0.1
0.0
Imp Corr 1m

Imp Corr 3m

Imp Corr 6m

Imp Corr 12m

Imp Corr 24m

Real Corr 1m

Real Corr 3m

Real Corr 6m

Real Corr 12m

Real Corr 24m

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

16

February 3, 2014

Exhibit 23: One-month implied and realized correlation metrics across the S&P 500 and sector ETFs.
5y history through January 31, 2014 market close.
1m Realized Correlation, 1 month change

1m Realized Correlation
0.7

0.25

0.66
0.59

0.6

0.4

0.12

0.15

0.50

0.5

0.22

0.20

0.55
0.39

0.10

0.10

0.39

0.36

0.33

0.36

0.07

0.00

0.00

0.27

0.3

0.04

0.02

0.05
-0.05

0.2

-0.03

-0.10

0.1

-0.15

0.0

-0.20
SPX

XLU

XLF

XLI

XLE

XLB

XLE
lcorr
Rcorr
0.45
0.50
0.41
0.28
1.03
0.86
0.64
0.60
0.32
0.22

SPX
lcorr
Rcorr
Current
0.37
0.33
1 month ago 0.29
0.31
High (5y)
0.79
0.83
Median (5y)
0.45
0.39
Low (5y)
0.21
0.10

XLY

XLV

XLF
lcorr
Rcorr
0.59
0.59
0.52
0.62
0.95
0.94
0.66
0.58
0.45
0.19

XLP

SPX

XLK

XLK
lcorr
Rcorr
0.31
0.27
0.21
0.16
0.78
0.75
0.45
0.39
0.17
0.03

XLP
lcorr
Rcorr
0.46
0.36
0.37
0.50
0.71
0.85
0.44
0.40
0.23
0.07

XLE

XLY
lcorr
Rcorr
0.32
0.39
0.27
0.27
0.86
0.81
0.45
0.39
0.22
0.11

XLY

XLK

XLU

XLB
lcorr
Rcorr
0.44
0.39
0.32
0.39
0.90
0.89
0.57
0.54
0.28
0.10

lcorr
0.58
0.41
0.93
0.63
0.35

XLI

XLI
Rcorr
0.55
0.50
0.94
0.59
0.16

XLB

XLF

XLV
lcorr
Rcorr
0.42
0.36
0.30
0.51
0.77
0.80
0.43
0.40
0.22
0.08

-0.14

-0.14

XLV

XLP

XLU
lcorr
Rcorr
0.60
0.66
0.59
0.59
1.00
1.00
0.62
0.59
0.12
0.19

S&P 500 and Sectors: 1m Implied and Realized Correlation (5y)

Impl vs Rlzd Corr (1m)

1.2

XLE

SPX

XLF

XLK

XLP

XLY

XLB

XLI

XLV

XLU

1.0
0.8
25-75 %-ile
Max
Min
1w Ago
Current

0.6
0.4
0.2
0.0
ICorr

RCorr

ICorr

RCorr

ICorr

RCorr

ICorr

RCorr

ICorr

RCorr

ICorr

RCorr

ICorr

RCorr

ICorr

RCorr

ICorr

RCorr

ICorr

RCorr

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

17

February 3, 2014

ETF risks
Exchange Traded Funds (ETFs) are redeemable only in specified units and only through a broker that is an authorized participant in
that ETF program; redemptions are for the underlying securities. The public trading price of a redeemable unit of an ETF may be
different from its net asset value; an ETF can trade at a discount or premium to the net asset value. There is always a fundamental
risk of declining stock prices, which can cause investment losses.

Investors should consider the investment objectives, risks, and charges and expenses of an ETF carefully before investing.
Each ETF prospectus contains such information about the ETF, and it is recommended that investors review carefully such
prospectus before investing. A copy of the prospectus for all ETFs mentioned in this material can be obtained by investors
from their Goldman Sachs sales representative, or from the offices of Goldman, Sachs & Co., 85 Broad Street, New York, NY,
10004, Attn: Prospectus Dept. (1-212-902-1394). Prospectuses are also available from ETF distributors.
Goldman Sachs is an authorized participant in each ETF mentioned in this material and participates in the creation and redemption
of shares of each ETF mentioned in this material. Goldman Sachs, as an authorized participant or otherwise, acquires securities
from the issuers of the ETFs mentioned in this material for the purposes of resale. As of January 30, 2014, Goldman Sachs has the
following positions: EEM – short, EWC – long, EWH – short, EWJ – short, EWT – short, EWW – long, EWY – long, EWZ – short, FXI –
long, XLB – long, XLE – long, XLF – long, XLI – long, XLK – long, XLP – long, XLU – long, XLV – long, XLY – long. Professionals who
authored this material have no financial interest in any ETF mentioned in this material. One or more affiliates of Goldman Sachs is a
specialist, market maker or designated liquidity provider for the following ETFs: EEM, EWH, EWJ, EWT, EWW, EWY, EWZ, FXI, XLB,
XLF, XLP, XLU, XLV, XLY.

Goldman Sachs Global Investment Research

18

February 3, 2014

Disclosure Appendix
Reg AC
We, Krag Gregory, Ph.D. and Jose Gonzalo Rangel, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or
their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Disclosures
Option Specific Disclosures
Price target methodology: Please refer to the analyst’s previously published research for methodology and risks associated with equity price targets.
Pricing Disclosure: Option prices and volatility levels in this note are indicative only, and are based on our estimates of recent mid-market levels(unless otherwise noted). All prices and levels
exclude transaction costs unless otherwise stated.
General Options Risks – The risks below and any other options risks mentioned in this research report pertain both to specific derivative trade recommendations mentioned and to discussion of
general opportunities and advantages of derivative strategies. Unless otherwise noted, options strategies mentioned in this report may be a combination of the strategies below and therefore carry
with them the risks of those strategies.
Buying Options - Investors who buy call (put) options risk loss of the entire premium paid if the underlying security finishes below (above) the strike price at expiration. Investors who buy call or put
spreads also risk a maximum loss of the premium paid. The maximum gain on a long call or put spread is the difference between the strike prices, less the premium paid.
Selling Options - Investors who sell calls on securities they do not own risk unlimited loss of the security price less the strike price. Investors who sell covered calls (sell calls while owning the
underlying security) risk having to deliver the underlying security or pay the difference between the security price and the strike price, depending on whether the option is settled by physical delivery or
cash-settled. Investors who sell puts risk loss of the strike price less the premium received for selling the put. Investors who sell put or call spreads risk a maximum loss of the difference between the
strikes less the premium received, while their maximum gain is the premium received.
For options settled by physical delivery, the above risks assume the options buyer or seller, buys or sells the resulting securities at the settlement price on expiry.

Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution

Buy

Hold

Investment Banking Relationships

Sell

Buy

Hold

Sell

Global
32%
54%
14%
53%
45%
36%
As of January 1, 2014, Goldman Sachs Global Investment Research had investment ratings on 3,637 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment
Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage
groups and views and related definitions' below.

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be obtained from Goldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further information on the subject company or companies referred to in this research may be obtained
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Ratings, coverage groups and views and related definitions
Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a

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Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all
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Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one
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information is not meaningful and is therefore excluded.

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