Thursday, March 10, 2016

Volatility Premium Paradox

Most of the market volatility exist because the market crowd is being biased and irrational and consistently fails to estimate the future.

At the other hand, the same market crowd wants a premium for being exposed to market volatility.

It sounds a paradox: the market crowd wants to be paid for consistently failing to do its job of correctly pricing the assets. They want to be paid - and, actually, are paid - for the failure.

2 comments:

  1. That's an interesting way of looking at it. I'm not sure I grant the premise though. Surely market volatility could exist because there is fundamental uncertainty in asset pricing, no?

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    1. Some volatility, of course, is the result of uncertainty. But some is the result of emotionally driven overshoots in perception of uncertainty.

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