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I think both can happen and here is my reasoning. Please correct me if I am wrong.

During times of increased volatility in the equity market, investors adopt a more risk-averse approach and gravitate towards safer assets (bonds) to safeguard their investments. As a consequence, there is a tendency for interest rates to decrease since demand for bonds increases.

But can increased volatility can actually lead to higher interest rates? This is when investors demand higher risk premiums in order to compensate for the increased risk.

I am confused now. I don't know if I made any logical errors here.

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  • $\begingroup$ I don't think there is much, if any effect. It should be quick to check when you plot HV or IV against some interest of your choice. $\endgroup$
    – AKdemy
    Jul 25, 2023 at 23:10

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