Alpha Exchange Correlation, Crowding and Convexity
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Jun 20, 2024 Exploring the dispersion trade, pricing of vol and correlation, and the potential risks during risk-off episodes. Analyzing stock correlation levels, volatility, and market risk. Understanding market volatility events, risk-off conditions, and challenges in volatile markets. Exploring market dynamics, policy responses, and the importance of equity index insurance amid uncertain macroeconomic factors.
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Correlation and Volatility
- Realized correlation among S&P 500 stocks is remarkably low, currently at 4%.
- This low correlation artificially suppresses index volatility, creating a deceptive calm.
Amaranth and Spillover Risk
- In June 2006, the VIX spiked over 30% in two days due to Amaranth's forced selling of short-dated S&P variance swaps.
- This was triggered by their losses in the natural gas market, illustrating spillover risk.
Market Risk Framework
- Market risk events often follow a pattern: new news shatters consensus, impacting prices.
- This can be seen in past events like the tech bubble and the 2008 financial crisis.