Dean Curnutt - The Reflexivity of Equity Volatility (S6E16)
Sep 11, 2023
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Dean Curnutt, founder of Macro Risk Advisors, discusses the nature of risk in markets, touching on various crises, reflexivity, risk recycling, and the evolving role of the Fed. They explore the 1987 stock market crash, Long-Term Capital Management, the 2008 Financial Crisis, the XIV implosion of 2018, and the 2020 COVID crisis. This episode is a must-listen for risk-focused individuals and those interested in market dynamics.
Market crises are endogenous and influenced by risk-taking, reflexivity, crowding, risk recycling, and the evolving role of the Fed.
Regulatory changes after the 2008 financial crisis increased risk recycling, leverage, and market fragilities.
Understanding credit derivatives and their risks in the financial market is crucial, emphasizing the need to comprehend credit market dynamics and potential systemic risks.
Deep dives
The Nature of Risk and Market Crises
This podcast episode explores the nature of risk and its manifestation in market crises. It discusses historical events such as the crash of 1987, long-term capital management, the financial crisis of 2008, the XIV implosion of February 2018, and the 2020 COVID crisis. The conversation touches upon topics like reflexivity, crowding, risk recycling, and the evolving role of the Fed. It provides insights into the nature of market risks, how they are woven into the fabric of markets, and why crises seem to occur periodically.
The Influence of Regulatory Regimes
The podcast highlights how regulatory regimes can shape market behavior and risk-taking. It discusses the regulatory changes that occurred after the financial crisis of 2008, which led to increased risk recycling and leverage in the market. It also mentions the impact of regulatory changes on credit derivatives and how the dispersion of risk in the system can contribute to market fragilities.
The Endogenous Nature of Market Risk
The episode emphasizes the endogenous nature of market risk and how risk-taking plays a significant role in shaping market outcomes. It highlights examples such as the UK's systemic risk event in 2020, where leverage and risk recycling in the LDI hedging program exposed the pension industry to potential bankruptcy. The discussion also touches on the influence of crowded trades and the importance of understanding the behavior of market participants in assessing market risks.
The Importance of Understanding Credit Derivatives
The podcast episode explores the significance of understanding credit derivatives and the potential risks they pose in the financial market. The speaker shares insights from their experience in the derivative and convertible sales industry, highlighting the controversial magnetar trade and its role in perpetuating the daisy chain of risk taking in mortgage markets. They emphasize the need to comprehend the speed at which credit markets move and the potential systemic risks that can arise when volatility rises. The episode also discusses the changing role of banks in the volatility space post-GFC and the shift towards electronic trading and liquidity provision.
Volatility as a Feature and Bug in Markets
The podcast episode delves into the concept of volatility and its role in financial markets. The speaker explores whether volatility is a feature or bug, acknowledging the challenges in quantifying its worth. They discuss the importance of identifying opportunities where options are cheap or rich and provide examples where the implied volatility was either too low or too high in relation to the underlying asset. The episode also touches on the impact of regulations on the pricing and provision of liquidity, highlighting the role of exchanges and the dispersion of risk-taking in the equity derivative market. Additionally, the speaker discusses the behavioral aspects of market crises and the benefit of fostering collaboration and sharing knowledge through initiatives like the Macro Minds Foundation.
In this episode I speak with Dean Curnutt, founder of Macro Risk Advisors and host of the Alpha Exchange podcast.
This episode is all about the nature of risk. More specifically, the endogenous risk that can manifest in markets. We discuss the crash of 1987, Long-Term Capital Management, the Financial Crisis of 2008, the XIV implosion of February 2018, and the 2020 COVID crisis.
With these crises in mind, we touches upon topics such as reflexivity, crowding, risk recycling, and the evolving role of the Fed. Dean also shares his thoughts about the nature of risk, how it is woven into the fabric of markets, and why it seems like there’s a crisis every 11 years.
For those who love to think about risk and the nature of markets, this episode is for you.
So sit back, relax, and enjoy this episode of Flirting with Models with Dean Curnutt.
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