Volatility levels have tripled in the Asian equity markets since the collapse of Lehman Brothers, according to new research by Credit Suisse Advanced Electronic Services, which also asserts that bid-ask spreads in the region have soared by almost 40%.
In the research note, subtitled ‘Forget what you knew about trading!’, the investment bank reported that one-month rolling volatility for the MSCI all-country Asia-Pacific Index had reached 65% per annum in the week ending 17 October, having stood at just above 20% prior to the bankruptcy on US investment bank Lehman Brothers, announced 15 September. This level represents a 270% year-to-date increase in volatility.
Credit Suisse added that bid-ask spreads had widened by an average of 18% across all Asian markets “in a matter of days” following Lehman Brothers’ demise. This represents a 38% increase compared with median spreads of 33 basis points earlier in the year. Singapore (36%), Hong Kong (35%) and Australia (33%) experienced the largest rises in median spreads after 15 September, while Korea and Japan only registered 6% and 16% increases respectively.
Monthly traded value was broadly flat across Asian markets after 15 September, according to Credit Suisse, as sharp price declines were offset by surging volumes. The bank said that the number of shares traded in Asia increased by 28% on a monthly basis following Lehman’s collapse, quantifying “massive selling pressure”. However, quoted liquidity fell sharply, with median best bid-ask sizes as a percentage of daily volume falling by around half on most markets, with the notable exception of Taiwan, where narrow price limits boosted sellers. Credit Suisse also observed increased trading activity during auction sessions.
In extreme market conditions, Credit Suisse said that the impact of restrictions on short-selling on spreads was difficult to isolate. Australia banned short-selling for all stocks on 22 September, followed by similar restrictions by Taiwan on 30 September and Korea on 1 October. Although spreads widened in all three markets following the imposition of restrictions, the large increases in bid/ask spreads experienced in the Hong Kong and Singapore markets – where regulations remained unchanged – made it “hard to extract” the impact of shorting restrictions.