Volmageddon and the Failure of Short Volatility Products

Financial Analysts Journal, Forthcoming

37 Pages Posted: 6 Apr 2021 Last revised: 7 Apr 2021

See all articles by Patrick Augustin

Patrick Augustin

McGill University

Ing-Haw Cheng

Dartmouth College - Tuck School of Business

Ludovic Van den Bergen

McGill University

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

Augustin, Patrick and Cheng, Ing-Haw and Van den Bergen, Ludovic, Volmageddon and the Failure of Short Volatility Products (April 4, 2021). Financial Analysts Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3819342 or http://dx.doi.org/10.2139/ssrn.3819342

Patrick Augustin

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://https://patrickaugustin.ca/

Ing-Haw Cheng

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Ludovic Van den Bergen (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

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