Author: Harbourfront Technologies

Peter Carr recently gave a talk on volatility trading at the Fields institute. Summary: In general, an option’s fair value depends crucially on the volatility of its underlying asset. In a stochastic volatility (SV) setting, an at-the-money straddle can be dynamically traded to profit on average from the difference between its underlying’s instantaneous variance rate…

Read More Volatility, Skew, and Smile Trading

Value at Risk (VaR) is an important risk measure that large financial institutions use for managing the risks and allocating capital. Wikipedia defines VaR as follows: Value at Risk (VaR) is a measure of the risk of investments. It estimates how much a set of investments might lose, given normal market conditions, in a set…

Read More Is Value at Risk a Good Risk Measure?

The volatility index was created more than 30 years ago. Since then it has become a favorite tool for both speculation and risk management.  There is now strong evidence that VIX futures and related exchange-traded products are changing the market dynamics. Specifically, in the early days of the VIX, the cash market led the futures.…

Read More What Do Creators of the VIX Think of Volatility?

Credit derivatives, the types of complex financial instruments that were responsible for the 2008-09 Global Financial Crisis, are back to the news. Two months ago, Frances Schwartzkopff of Bloomberg reported, A complex credit product that regulators are still trying to get their heads around is proving popular with some big institutional investors in Europe. The…

Read More Credit Derivatives-Is This Time Different?

Last Thursday witnessed, again, another dramatic increase in volatility. The volatility index VIX spiked 44 percent to 16.04%, its highest daily close for the year. As shown below, the VIX futures term structure inverted in the short end. Two days before the event, Helen Bartholomew of Reuters warned that the net short position in the…

Read More VIX Futures Leads Cash Market: Tail Wags Dog

It happened again, and again. Last Thursday volatility increased sharply at around 1.30 p.m, then it came back to normal at the end of day. For now, we ignore the cause. But this event reinforced our observation: sharp volatility spikes occur more and more frequently these days. In a low volatility environment like this one,…

Read More Potential Black Swans and How to Hedge Against Them

Quantitative trading has become a topic du jour lately. Many investors have been considering allocating more capital to quantitative funds. However, not all experts share the same opinion regarding the merits of quantitative strategies. There are even quants among the skeptics. Emanuel Derman is one of the most respected experts in the quant community. He…

Read More Do Quantitative Trading Models Work?

In the continuation of the “Low Volatility is Not a New Normal” theme, Adam Samson of Financial Times published another post based on the recent report by JPMorgam which suggested using VIX options for managing the risks. Risk assets, like stocks, have been rallying “for years”, sending market volatility near “record lows… While fundamentally volatility…

Read More VIX Options: Should We Buy Them When Volatility is Low?

Last week, JPMorgan issued a report on the state of quantitative investing and the current low volatility environment. The report pointed out that despite the political uncertainties (Comey testimony, UK elections, ECB, geopolitical uncertainty, Qatar etc.), the volatility remains subdued. In fact, in the last 20 years the VIX closed lower than 10 for a…

Read More Low Volatility is Not a New Normal