Volatility Library

Article by: Peter Carr, Liuren Wu
Published by: Presentation at Baruch College
Date: 30 Mar 2009

Disentangling the Multi-dimensional Variations in S&P 500 Index Options

“The equity index and index volatility interact through several distinct channels. First, holding business risk fixed, an increase in the level of financial leverage raises the level of the equity volatility. Second, regardless of the level of financial leverage, a positive shock to business risk increases the cost of capital and reduces the valuation of future cash flows, generating an instantaneous negative correlation between asset returns and asset volatility. Finally, the market experiences both small continuous movements and large market disruptions. The large and negative market disruptions often generate self-exciting behaviors. The occurrence of one disruption induces more disruptions to follow, thus raising market volatility. We propose an equity index dynamics that capture all three channels of interactions through the separate modeling of the asset return dynamics and the financial leverage variation. We analyze how the different sources of variations impact the index options behaviors differently across a wide range of strikes, maturities, and calendar days.”

Full article (PDF presentation): Link

Article by: Robert Huebscher
Published by: Advisor Perspectives
Date: 3 Feb 2009

“The concept of volatility as an asset class is the latest result of the never-ending quest to create products for consumption by the investor community. But while volatility might serve a useful purpose as a measure of investor sentiment, it is only a true asset class for the marketing purposes of Wall Street’s financial engineers.”

Full article (PDF): Link

Article by: Lawrence G. McMillan
Published by: Barrons
Date: 5 Oct 2011

“Traders of volatility derivatives — futures, options, or exchange-traded funds and notes — often wonder why the VIX, or the Chicago Board Options Exchange Market Volatility Index, moves much more violently than do the derivative contracts that are based on it.

“This particularly vexes derivative holders when the market plunges and the VIX (which rises as fear grows) climbs by far more than the futures do. I use the futures as a measuring stick, because the prices of the others — options, ETFs, ETNs — are based on the futures’ prices.”

Full article (subscription required): Link