Volmageddon and the Failure of Short Volatility Products
Authors: Patrick Augustin, I-H. Cheng and L. Van den Bergen
Publication: Financial Analysts Journal, Forthcoming; First published online May 20, 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 5 February 2018. In this article, we describe this 鈥淰olmageddon鈥� 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.
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