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Goldman Sachs: Mkt Seems To Underprice Switching Election Risk


Monday saw Goldman Sachs note that "using history as a guide, vol market pricing for the month post-election appears roughly consistent with the average pick-up in volatility in switching years, but it is notable that most of that premium comes from the election itself and immediate aftermath, implying a reversion towards current volatility levels thereafter. While the immediate premium may be in part associated with expectations that a Biden victory is the most likely outcome (currently prediction markets imply a roughly 60% probability of a Biden victory), it may also reflect the risk of delays in tabulating results (which is seemingly more consistent with the relative lack of premium beyond the roughly week and a half post-election). The market, therefore, appears to be somewhat underpricing the risk of a switching election; relative to what is priced, history suggests that a Biden victory, and more specifically a Democrat sweep, is likely to result in a longer period of elevated rates market volatility."

MNI London Bureau | +44 0203-865-3809 |
MNI London Bureau | +44 0203-865-3809 |

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