SOURCE: Russell Investments

Russell Investments

June 12, 2015 12:22 ET

US Small Cap Volatility: CBOE Expert Comments on Historical Small Cap Market Volatility in June as Russell Readies Annual Index Reconstitution

SEATTLE, WA--(Marketwired - Jun 12, 2015) - As Russell Indexes prepares for its annual reconstitution, some market watchers contend that Russell's annual rebalance, particularly for the U.S. small cap Russell 2000® Index, may create additional U.S. market volatility during the month of June.

Russell Rhoads, CFA and senior instructor with the Options Institute at the Chicago Board Options Exchange (CBOE), recently examined historical U.S. small cap market volatility through the lens of the Russell 2000 Index and the CBOE Russell 2000 Volatility Index(SM). He found that, over the last 11 years, realized volatility for the U.S. small cap equity market as shown by price volatility for the Russell 2000 Index was in the middle of the pack in June (sixth most volatile month) relative to other months of the year.

In addition, for the same time period, implied volatility for the U.S. small cap equity market as shown by price volatility for the CBOE Russell 2000 Volatility Index, was also in the middle of the pack in June (again, sixth most volatile month) relative to other months of the year.

According to Rhoads, "What this tells me is that the market is aware of the Russell Indexes reconstitution process, but the process has not had any notable impact on the Russell 2000 Index or Russell 2000 Index options pricing historically. The result may be a lack of extra volatility that many traders like to take advantage of, but the apparent lack of historical market volatility around the Russell rebalance may lead to a smooth transition for investors charged with tracking the Russell 2000."

Investors will be focused on the Russell Indexes in the coming weeks, as Russell prepares for its annual indexes reconstitution. At reconstitution, the entire Russell family of global indexes, including the Russell 1000® Index and Russell 2000® Index, are rebalanced to ensure that the indexes continue to accurately reflect the market. As part of the reconstitution process, which will conclude at U.S. market close on Friday, June 26th, composition, ranges and breakpoints between U.S. large and small-cap stocks will be adjusted to reflect the current market environment.

To read the full blog post from Rhoads on this topic, go to the CBOE Options Hub. For more information on the Russell Indexes and Russell Indexes annual reconstitution, go to the FTSE Russell website.

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