Tag: Market volatility

Zero-day options and financial market vulnerability

Bowen Xiao

Zero-day options have exploded in popularity in recent years, accounting for approximately half of S&P 500’s total options volume, a ten-fold increase from just 5% in 2016. Their flexibility, low premia and underlying leverage appeal to all market participants ranging from conservative investors hedging against intraday market volatility to aggressive traders speculating for quick profit generation. The rapid rise of zero-day options and the memory of a market stress episode known as ‘Volmageddon‘ raises concerns that zero-day options could lead to a similar event. There are differing views among participants on the perceived risks of zero-day options. This post aims to provide a balanced overview.

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Do core and transitory volatilities matter for the economy?

Jeremy Chiu, Richard Harris and Evarist Stoja

Financial market shocks: do they matter for the economy?

Financial markets are intrinsically volatile, constantly fluctuating in response to a wide variety of news. Often, these shocks to volatility are short-lived, perhaps reflecting a one-off adjustment in asset prices or the market’s overreaction to news, and have a tendency to dissipate rapidly. But sometimes they lead to a sustained increase in market volatility, reflecting a deeper uncertainty over the future macroeconomy that can take time to resolve itself.  Indeed, a considerable body of empirical evidence suggests that financial market volatility is made up of two components: a slowly varying ‘core’ component and a ‘transitory’ component that dissipates quickly. We develop a way to identify each type and estimate how they affect the broader economy.

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