InvestorQ : What is this Volfefe Index that has been just launched and how can it be useful to an investor like me?
NISHA Nayak made post

What is this Volfefe Index that has been just launched and how can it be useful to an investor like me?

2 years ago

Interestingly, this is an index of the impact of the tweets put out Donald Trump on Twitter. Donald Trump is one of the most followed handles on Twitter and he puts out tweets on a number of sensitive policy matters like the trade war with China, the rate cuts by the Fed, BREXIT etc. In the last couple of years it has been observed that Trump’s tweets have a significant impact on the equity and the bond markets and the Volfefe Index is meant to measure the impact of these tweets on the financial markets.

The Volfefe index has been designed by analysts at JP Morgan and it seeks to quantify quantified the impact of his tweets, at least on the US interest rates market. In fact, this is one segment that has been the most sensitive to the tweets put out by Trump and it is also a barometer of the overall direction for the US economy and also the global economy.

JP Morgan analysts have deployed machine learning techniques and their own internal volatility model to show how the president’s 280-character messages on Twitter served to raise investor expectations about future moves in the U.S. rates market. While the direction of price moves and their lasting power may be uncertain, Trump’s tweets often spark a sharp reaction across asset classes. It is this volatility impact that the index tries to capture.

The Volfefe index will explain a measurable fraction of moves in the market’s forecast of likely movement in 2-year and 5-year rates. For example, if the 2 year rates move by 10 basis points then the Volfefe index will explains what percentage of this move can be attributed to the tweets put out by Donald Trump? The index has also identified the Twitter keywords with the maximum impact on rates with the word “China” being most effective. The JPM analysts have also pointed out that while this index was currently limited to US interest rates, it could be applied to equity and currency markets too.

Another large investment house, Citigroup, has also found that a wide range of currency pairs logged higher-than-expected volatility within one-hour after a Trump tweet. Of course, to what extent such a measure really works in practice remains to be seen but this surely remains an interesting area that analysts are moving into.