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4min chapter
Liquidity Cascades
Flirting with Models
Arbitrage Constraints in the S an P 500 Ultimate Make or Break Markets
The vix is derived from the s m p 500 option chain, creating an arbitrage constraint between vix futures and that option chain. In october 19 87, markets plummeted due to the program selling of portfolio insurance strategies. These strategies were designed to sell equity market futures to help buffer against losses as markets declined. As a crowded trade, under the right conditions, it could spiral out a control, creating relentless selling pressure. But if the price was wrong, why did nobody step in to correct it?
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