The next article may explain what happened to the markets lately:-

One can only marvel in the financial sector's creativity in finding new resources to exchange. Unfortunately, its creations create things to be concerned about.
20 decades ago, volatility - that the rate of change of asset prices - wasn't a separate sort of investment. Investors would have agreed that drops in prices were a bad thing left it at that. Today commentators fret about the volatility of most financial markets has been so low. Even the turbulence, for example, stockmarket dip on February 27th, was short lived.
The International Monetary Fund's newest semi Global Financial Stability Report is sanguine about issues such as the US housing market. Nonetheless, it frets about a possible'volatility shock' from the system which could'precipitate portfolio alterations a disorderly unwinding of positions' or, in other words,'' a fear.
The finance indies the very low volatility of recent decades may be owing to higher economic stability, improved central-bank credibility or greater dispersion of risks around the financial system. However, a part of the explanation might be cyclical, especially liquidity borrowings by firms risk appetites.
These variables can feed on themselves. When volatility is low, investors are tempted to take risks. They'll borrow money in low-yielding currencies to invest at higher yields elsewhere (carry trade); they'll write options; making premiums for sale insurance against extreme market moves etc.. The danger, as the IMF points out, is that investors could be badly caught out when trends change.
Volatility could be measured in two ways. Volatility looks at the movements of prices in financial markets. However, the Vix of the Chicago Board Options Exchange, the percentage, seems at Implied Volatility. This is backed from option prices. The price an investor is willing to pay for a choice depends on a range of variables, including interest rates the relationship between the market price the exercise price. What remains when all these variables are eliminated is that the mystery ingredient - Implied Volatility.
The ever-inventive financial industry has found ways to exchange the gap between realised implied volatilities. Investors can get involved in a'variance swap', whereby a single counterparty agrees to get Implied Volatility another receives Realised Volatility.
So, if you would like to have a stake on market turbulence, you'd generally elect for the realised portion of this swap. But unless that turbulence appears quickly, such a bet will drop money. This is only because Implied Volatility is generally higher than Realised Volatility. The majority of the time, in other words, it pays to bet on volatility.
Indeed, volatility includes a'curve, like the bond market, which generally jumps upward over time. The Vix signifies the short-dated end of the curve. Only rarely, as on February 27th, does the curve'reverse' so that short-term Implied Volatility is higher than long-term.
Soit requires not necessarily be the investors are complacent in permitting Implied Volatility to ramble so low. Of betting on higher volatility, the cost may be placing off them.
The IMF is unconvinced. It finds a worrying sign of complacency -'tail risk' from the options market. Ever since the crash of October 1987, when Wall Street fell nearly 23% every day, investors have been sensitive to the risk of an extreme fall. They have been willing to pay a higher price (as measured by Implied Volatility) for extreme out-of-the-money options compared to contracts that insure against smaller market declines. However, this premium has been decreasing in recent decades. Investors are becoming less concerned about extreme events.
Since 2003, being blasé has been the most profitable egy. Risky resources have done well; for instance, the spreads on emerging-market debt hit an all-time low. Market shocks are subdued. Even February 27th's 400-point drop in the Dow Jones Industrial Average came down the league table of percentage daily drops.
However, what might cause risk appetite to change volatility to soar? The answer is Harold Macmillan's term,'Events, dear boy, events'some incidents or unanticipated corporate failures. Emerging-market debt would be a casualty of such a shift. The IMF reckons thatif volatility transferred over its post-1990 average, emerging-market debt spreads would more than twice. Something to fret about indeed.

- Courtesy of The Economist dated 12 Apr'07 variant