Download This PaperVolmageddon and the Failure of Short Volatility Products
Financial Analysts Journal, 2021, 77(3): 35-51
37 Pages Posted: 6 Apr 2021 Last revised: 25 Aug 2021
Date Written: April 4, 2021
Abstract
The rapid growth of exchange traded products (ETPs) has raised concerns about their implications for financial stability. A case in point is the abrupt market crash of short volatility strategies on February 5th 2018. In this paper, we describe this “Volmageddon” event and illustrate the risks associated with hedge and leverage rebalancing when markets are highly concentrated and volatile. The Volmageddon episode provides valuable risk management lessons because it illustrates the pitfalls of hedge and leverage rebalancing and is reminiscent of the losses incurred through portfolio insurance schemes.
Keywords: crowded trades, derivatives, price impact, risk management, VIX
JEL Classification: G01, G11, G12, G13, G14
Suggested Citation: Suggested Citation
Ing-Haw Cheng
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
HOME PAGE: http://inghawcheng.github.io