Liquidity Cascades
Flirting with Models
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Index Volatility Is Low Because Correlation Between Components Is High
implied volatility in the s m p 500 dipped to 30 % below its prior historical low. measured correlation across its components also declined to record levels as the index slowly climbed over 20%. But why was correlation amongt securities so low? Typically we would think of index volatility as being a function of the volatility of the underlying components and their correlation. In a world driven by index level basket trading, this may have become reversed.
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