Jacques Ninet – La Française
Long-range charts of market volatility (historical and implied as well) show better than a long speech how return (and prices) periodically enter phases of big (extreme) variations. From a statistician point of view, this two regime distribution can be modelled through jumps (Poisson ; Levy ; Merton). However, the question remains, for asset managers, to adapt their strategies, that is, basically, not to pay for overvalued risk during subdued risk periods and be efficiently underexposed ahead of jumps.
What is the impact of price jumps in asset prices in risk management and asset management? How to take care of discontinuities in financial markets?
- Material :
- Jacques Ninet “Two tales of liquidity stress”
Summarry of the discussion :
In this group we tried to answer three questions about jumps :
1/ Are jumps the signal of markets entering a high volatility regime or are they the consequence of such a move ? Put it in other way, jumps may either be the results of exogenous shocks (9/11) and spillover effects or they may be a typical endogenous mechanism (cf. the Nikkei 1989 crash). Behind this question lies a more decisive one, from the Asset manager’s standpoint : is a shock a one-off event or a cumulative one ? The first one offers a clear buying opportunity. The second command a major shift of the portfolio market exposure. Academic research has so far done little about cumulative extreme volatility periodic returns.
2/ As far as the Volatility market (VIX) has shown a low predictive power (see for instance its 2007- mid 2008 low levels) using long put strategies may be ineffective either during the long lasting low volatility periods (too expansive) AND to cushion big losses in front of a regime shift. The question of efficient portfolio insurance remains thus to be addressed (sophisticated dynamic options strategies ??)
3/ The first step toward the point 2/ is to try to forecast endogenous jumps, through macro-economic (fundamental) or macro-finance (market, technical) approach. Exploring small markets cracks might be an interesting start.