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Human Passions and Asset Volatility

Steve LeCompte | | Posted in: Big Ideas, Volatility Effects

Guide Volatility and the VIX Volatility and returns

Key Insight

Derman's December 2022 paper argues that standard deviation is an inadequate equity risk measure given non-normal returns and that volatility-trading models are prone to failure, advising caution with complex, abstract parameters (conceptual review; no empirical test).

How should investors think about, and perhaps exploit, asset return volatility? In his December 2022 paper entitled "A Stylized History of Volatility", Emanuel Derman reviews how generations of financial modelers have quantified volatility and ultimately created tradable volatility-based assets. He also discusses some general modeling considerations. Based on the body of research and his experience, he concludes that:

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