Quantitative Methods

Equity Market Volatility - What You Need to Know

The Top 10 White Papers on Volatility

Over the last 12 months, equity markets have exhibited unusually low volatility, despite a challenging economic and political backdrop. Why is this? Or is it an illusion? Nikko argues that risk has moved away from the centre of the probability distribution, and towards the tails.

The papers below examine different facets of volatility, including volatility forecasting, option pricing, volatility trading and volatility protection. All of these papers are free to access for members of Savvy Investor.

volatile sea Equity Markets Volatility white papers

Equity Market Volatility: It's Quiet Out There, Too Quiet (T.Rowe Price, Apr 2017)
Although equity markets are continuing to perform well, one source of discomfort is the surprisingly low level of volatility, especially given the uncertainties that remain ahead.

Mispricing of Volatility in a Post QE World (Nikko AM, Mar 2017)
Recent volatility measures, or even implied vol, provides only a partial picture of the current nature of risk. Nikko argues that risk has moved away from the centre of the probability distribution, and towards the tails.

With uncertainty so high, why is market volatility so low? (Wellington Management)
Wellington examines a growing paradox: with the outlook for economies and markets so uncertain, and in the face of political tension and anti-globalization sentiment, why is volatility so low?

Vix your portfolio - Selling volatility to improve performance (BlackRock)
BlackRock explores a strategy for increasing risk-adjusted returns, with smaller drawdowns, by selling volatility on a broad equity portfolio.

The Art and Science of Volatility Prediction (Lazard)
Uncertainty persists in every financial model. While there are multiple ways of quantifying this uncertainty, volatility is the most commonly accepted barometer.

Option Traders Use Sophisticated Heuristics, Never Black-Scholes (Nassim Taleb)
In this 2009 paper, Taleb and Haug consider the heuristically-derived pricing formula used by option traders. It is time to stop using the wrong designation for option pricing.

Dynamic Asset Allocation Through the Business Cycle (Oppenheimer)
A dynamic approach to asset allocation, by allocating assets according to the macro regime. The report defines macro regimes, and analyses how the risk premia of different asset classes differs within the regimes.

From LDI to VDI: the case for volatility driven investing (UBS)
A VDI, or volatility driven investment, approach may improve the outcomes of the standard LDI approach. The authors compare four different investment strategies and summarize their findings in this paper.

Volatility: We Don't  Know What We Are Talking About (Nassim Taleb)
This paper from Taleb and Goldstein explores the confusion between mean absolute and standard deviation. The mental confusion between these variables has an impact on the perception of market "volatility" and decision-making.

Dynamic downside protection (Russell Investments)
The new risk-on risk-off world that we have experienced since the GFC has seen a heightened volatility of volatility. In response, investors are seeking downside protection at a reasonable price.