It is possible to try to make general inferences as to why the VIX has been falling so precipitously, but pinpointing exact causes is difficult. One measure offers important context, however. The average 30-day implied pairwise correlation of stocks in the S&P 500 (Chart 1- right y-axis) has also been falling since 2012, a downtrend that has only grown more pronounced over the past year.

Low pairwise correlations in a low-volatility market environment may suggest that investors expect low volatility in the short term and/or that any market shocks will have a low probability of becoming systemic. In other words, investors may believe that the biggest near-term risk they face is a shock that affects only a discrete slice of the S&P 500, a risk that can theoretically be mitigated through diversification.

Additionally, individual stocks have become, on average, less volatile since the 2008 financial crisis, and especially so over the past year. Chart 2 plots the aggregate cross-sectional volatility for more than 1000 of the most liquid (based on trading volume) U.S.-listed equities. Once again, the data may imply that investors have adopted an increasingly sanguine outlook. A negative reaction to any approaching shock, investors seem to believe, will likely manifest meaningfully in only a narrow subset of the overall market.