Have Global Markets Handed the Volatility Baton to the US?

A series of broad realignments has defined equity markets in 2025, as investors seek opportunities outside the U.S. amid heightened policy uncertainty. A notable shift has been the growing interest in emerging markets, driven by their outperformance in the first half of 2025 relative to developed markets.

This rotation has been accompanied by a repricing of regional risk, particularly between the U.S. and emerging markets. In 2025, the beta of EM-equity implied volatility to U.S.-equity implied volatility fell to 0.4, its lowest level since 2019¹. This drop signals a potential structural shift in how volatility is perceived, the increasing stability of emerging markets and a broader divergence in how EM volatility is viewed versus that of developed markets.

Time period: Aug. 1, 2019, to Aug. 29, 2025. The plot shows data since inception of the 12-month rolling beta between EM volatility with respect to U.S. volatility. The beta represents the sensitivity of EM volatility to changes in U.S. volatility. EM-equity-market volatility represented by the MSCI EM Volatility Index (VXMXEF). U.S. equity-market volatility represented by the CBOE Volatility Index® (VIX® Index). Source: CBOE and MSCI.  

Though U.S. implied volatility declined despite ongoing policy uncertainty, it remained elevated relative to other regions. EM saw a sharper drop, reversing the 2020–2024 pattern when it consistently had the highest implied volatility among EM, EAFE² and the U.S. Realized volatility trends supported the same narrative. U.S. markets saw a steep pickup in realized volatility in 2025 compared to the prior five-year average. In contrast, EM and EAFE realized volatility remained relatively stable. The longer-dated realized volatility told a similar story as U.S. volatility stayed elevated, while volatility in EM and EAFE declined.

Time period: Jan. 1, 2020, to Aug. 29, 2025. EM equity-market volatility represented by the MSCI EM Volatility Index (VXMXEF). EAFE equity-market volatility represented by the MSCI EAFE Volatility Index (VXMXEA). U.S. equity-market volatility represented by the VIX Index. Volatility spreads calculated as the difference between the volatility index levels of the two regions. Realized volatility is calculated using 1-month rolling returns. Source: CBOE and MSCI.  

For investors who have long used US volatility as a proxy for global risks in their portfolios, under the assumption of a strong correlation between EM and U.S. volatility, the data presented here may challenge that assumption going forward. The diminishing sensitivity of EM volatility to U.S. shocks suggests that independently modeling EM risk could provide a more accurate assessment of EM-specific exposures within a portfolio.

Within a risk parity framework, where assets with lower volatility would receive a higher allocation, the U.S. historically would have received a higher weight than emerging markets (shown below). There have been exceptions, such as during COVID-19 when U.S. weights fell sharply within this framework. After COVID-19, however, the broader trend reversed course, pointing to a gradual increase in U.S. allocation alongside a decline in allocations to EM.

Time period: July 31, 2002, to Aug. 31, 2025. The plot shows the risk-parity allocations between MSCI EM, MSCI EAFE and MSCI USA Indexes. Risk-parity weights have been calculated using the previous 756-day daily return. 

However, the effect of the stark divergence in volatility trends this year on asset allocations can be illustrated using shorter-term lookback for risk-parity allocations. Year-to-date, the allocation to the U.S. has been on the decline and U.S., EM and EAFE allocations have converged to equal weights since the U.S. announced significant tariffs in April. This shift in allocation is such a rare occurrence over the data period that a continuation of this trend could challenge the traditional view of EM markets as structurally riskier. This change may warrant a reassessment of how regional risks are incorporated into historically-anchored models.  

Time period: July 31, 2002, to Aug.29, 2025. The plot shows the risk-parity allocations between MSCI EM, MSCI EAFE and MSCI USA Indexes. Risk-parity weights have been calculated using the previous 252-day daily return.

The volatility landscape in 2025 represents a shift in market dynamics. U.S. equities have become the primary source of global volatility — both implied and realized — reversing the long-standing view that emerging markets are inherently riskier than developed. At the same time, the rare convergence of risk-parity allocations across the U.S., EM and EAFE underscores the evolving nature of regional risk. Together, these developments highlight the need for investors to incorporate the new data when they revisit and potentially recalibrate asset-allocation frameworks.