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Correlated Unwind of Short Volatility?

Posted in Volatility Effects

Is volatility dangerously oversold? In their November 2017 paper entitled "Everybody's Doing it: Short Volatility Strategies and Shadow Financial Insurers", Vineer Bhansali and Lawrence Harris survey strategies that directly or indirectly short volatility, including:

  • Relevant strategies (selling options, buying and selling products linked to volatility indexes, risk parity, risk premium harvesting and volatility targeting).
  • Types of investors that use them.
  • Commonalities among them.
  • Implications of commonalities (correlated unwinding).

Based on the properties of these strategies, they conclude that:

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