Track 15 of 25

Volatility

Clustering, why quiet periods precede violent ones, realised against implied, and what a volatility spike does to a haircut.

25 lessons

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What volatility is, as a measurement rather than a moodA share moving eight dollars and a share moving thirty-seven cents can be equally volatile, and only one of them gets noticed.6 min
How a realised volatility is actually computedFive arithmetic steps on a short list of returns, and the last step hides a divisor most people never see.7 min
Annualising, and why the square root of time appearsVariances add across independent periods and volatilities do not, which is the entire reason a square root is involved.6 min
Why the window length changes the answerOne unchanged price series yields 42 percent, 36 percent or 30 percent, depending only on how far back the measurer chose to look.7 min
Volatility clustering, described and measuredTomorrow's direction is close to unforecastable; the size of tomorrow's move is not, and the asymmetry has a number.7 min
Why quiet periods precede violent onesQuiet does not cause violence; it shrinks the estimate of how violent things could get, and the estimate is what gets used.7 min
The volatility of volatilityThe input is more variable than most of the things it measures, and it cannot fall below zero while it can rise without limit.6 min
Realised against implied, and what the gap isThe usual comparison puts a forecast beside a history, which is why the gap so often points the wrong way.7 min
What implied volatility is the price ofWhat the premium pays for is a hedging programme, and the result settles in variance, not in quoted points.7 min
The variance risk premium, mechanicallyIn the units the exposure settles in, the premium is a third of implied variance rather than a sixth.7 min
Why implied usually exceeds realised, and when it does notIt wins sixteen quarters out of twenty and still averages almost nothing, because the four losses are more than three times the size.7 min
The term structure of volatilityEach expiry quotes an average over its whole life, so the difference between two of them prices a stretch of time neither one covers.7 min
What an inverted volatility term structure indicatesA downward slope is a dated forecast that the stress will end, and the date and the number can both be read off.7 min
The surface, and what a skew is measuringTrack 3 described the shape; the slope of it has a number, and a model reading a different column produces a different lending value.6 min
Why an equity skew exists at allA company's shares get more volatile as they fall for a reason involving no fear, no trading and no revision of anything.7 min
What a volatility spike does to a haircutThe advance rate falls because one figure in a formula moved, and nobody looked at the borrower, the price or the file.7 min
Why a haircut is a volatility forecast wearing different clothesRun the model backwards and a published percentage becomes readable, but only as one product of two numbers you must fix separately.7 min
From a volatility figure to a one-day loss estimateA percentile of an assumed distribution times a position gives a dollar figure, and the assumption is the weakest link in it.6 min
From one day to a liquidation windowFour and a half times the sessions gives only 2.12 times the discount, for a reason lesson 5 undermines.7 min
Why volatility targeting mechanically forces sellingA rule that holds risk constant must change position size, and the direction is decided before anyone looks at a price.6 min
Volatility as a trigger inside other people's rulesYour headroom depends on rules you are not party to, and nearly all of them read the same input your lender does.7 min
Dealer hedging, and flow that nobody choseA market maker with no opinion still has to sell into declines, and the amount is set by a curvature rather than a judgement.6 min
Why a quiet regime accumulates leverageBorrowing capacity is computed from volatility, so a calm year hands out room that a noisy one takes back without asking.7 min
The volatility feedback loop, end to endOne 6.2 percent session lifts a twenty-session estimate by 13.7 points, and the estimate costs more than the price does.7 min
One position, three volatility regimes, three cushionsNothing about the holding changes across the three cases, and the decline it survives goes from 38.6 percent to 6.5 percent.7 min

Educational only. Nothing in this track is investment, legal or tax advice, or a recommendation to enter into any transaction. Completion is stored in this browser and nowhere else.