Volatility Reports 5/23/22
May 21, 2022
May 21, 2022
Black swan events are a metaphor for an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact.
Back in 2013 when the Fukushima earthquake hit Japan there was a market incident where implied volatility on the Nikkei Dow jumped as high as 45 intraday in April of 2013. During that event the Nikkei Dow sold off with the Japanese government bonds selling off as well, hitting a 1% yield to maturity.
These jumps or spikes in volatility are short-covering rallies in the majority because the industry and public do not venture into trading for a bear market or a black swan event.
Rather the institutional types find a way to achieve a higher than average return by selling risk, they sell short the VX futures or the call options on the futures or some combination.
Add to that the dealer community being extremely short in volatility exposure and they have to buy it all back at once causing the spike.
The “bulletproof” mob that promotes the 60/40 split portfolio, they are faced with an interesting and inconvenient truth regarding modern portfolio theory (MPT). That is bond prices do not always move in the opposite direction as a stock market MPT has been built on the basis of an anti-correlation between bonds and stocks, which historically has proven untrue.
It is possible, if not likely, to enter an environment where stocks and bonds
This work by Jack Cahn is licensed under a Creative Commons Attribution-NonCommercial 4.0 International