Thursday, March 27, 2008

Are banks over reacting to risk?

Spreads between mortgage rates (prices) and risk-free treasury bills (costs) is getting really big:

It doesn't seem that this spread between prices and costs could be explained by increased risk. The Volatility Index (invented by colleague Bob Whaley) which measures the implicit risk in options prices (the higher the options price, the bigger implied risk) hasn't risen nearly as much. The expected annual change in stock prices is now 26%.

1 comment:

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