Mar

4

I have what is probably a naive question related to volatility products. Is there any direct effect on equities markets caused by so many people piling into volatility? I'm not talking about the fact it reflects an underlying fear.

I was wondering if the buying of volatility ETFs (and behind the scenes transactions to maintain them) would either somehow dampen actual volatility or help compress the spring further and accentuate any moves when the dam finally does break.

Just something I've been wondering about.

Kim Zussman writes:

A related question is whether correlation of implied volatility with underlying security price varies, and if so what this means. I noticed VIX was not making short-term lows when SP500 made all time highs on Wednesday.

A related related question is whether there is predictive value in the variation of correlation between implied and realized volatility.

Russ Sears writes:

Clearly I am not smart money, but I am naive. And perhaps the following statements will prove how naive I am and that I mistake the complexity of the question, but trading in general is honorable because it brings price discovery to all. Hence in general it decreases volatility. However, Hull from his book on options states that volume of trade increases volatility. I would suggest that trading makes volatility clear. For an counter argument of extreme- real estate is not liquid and therefore on accountant books it nice and stable, but that illiquidity has a big volatile price if one is forced to liquidate. 


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  1. William Brauer on March 4, 2017 11:41 am

    With high frequency trading isn’t volatility inherently greater
    than in the previous decades. With news spreading so fast markets react far more rapidly and this accelerated reaction time must be
    a huge driver as well.

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