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Katherine Johnson’s mathematical calculations helped guide some of America’s most important early space missions while she confronted the racial and gender barriers faced by Black women in twentieth-century America.
MORE →Reflects the personal views, recollections, and perspective of the author, Mike Davis.
This is a personal recollection on the Move fire on May 13, 1985
Variance risk premium is a phenomenon on the variance swap market, of the variance swap strike being greater than the realized variance on average. For most trades, the buyer of variance ends up with a loss on the trade, while the seller profits.[1] The amount that the buyer of variance typically loses in entering into the variance swap, is known as the variance risk premium. The variance risk premium can be naively justified by taking into account the large negative convexity of a short variance position; variance during rare times of crisis can be 50-100 times that of normal market conditions.
Using insurance as an analogy, the variance buyer typically pays a premium to be able to receive the large positive payoff of a variance swap in times of market turmoil, to "insure" against this.
The variance risk premium can also be analysed from the perspective of asset allocation. Carr and Wu (2009) examines whether the excess returns of selling or buying variance swaps can be explained using common factor models such as the CAPM model and the Fama-French factors, which include returns of different segments of stocks on the market. Despite the intuitive connection between stock price volatility and stock price, none of these models are able to strongly explain the excess returns on variance swaps. This implies that there is another factor that is unrelated to stock prices that affects how much, on average, one will pay to enter into a variance swap contract. This suggests that investors are willing to pay extra money to enter into variance because they dislike variance, not just because it is anti-correlated with stock prices, but on its own right. This leads to many considering variance as an asset class in and of itself.
In the years before the 2008 financial crisis, selling variance on a rolling basis was a popular trade among hedge funds and other institutional investors.
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Variance risk premium is a phenomenon on the variance swap market, of the variance swap strike being greater than the realized variance on average. For most trades, the buyer of variance ends up with a loss on the trade, while the seller profits. The amount that the buyer of variance typically loses in entering into the variance swap, is known as the variance risk premium. The variance risk premium can be naively justified by taking into account the large negative convexity of a short variance position; variance during rare times of crisis can be 50-100 times that of normal market conditions. Using insurance as an analogy, the variance buyer typically pays a premium to be able to receive the large positive payoff of a variance swap in times of market turmoil, to "insure" against this.
Volatility risk is the risk of an adverse change of price, due to changes in the volatility of a factor affecting that price. It usually applies to derivative instruments, and their portfolios, where the volatility of the underlying asset is a major influencer of option prices. It is also relevant to portfolios of basic assets, and to foreign currency trading. Volatility risk can be managed by hedging with appropriate financial instruments. These are volatility swaps, variance swaps, conditional variance swaps, variance options, VIX futures for equities, and (with some construction) caps, floors and swaptions for interest rates. Here, the hedge-instrument is sensitive to the same source of volatility as the asset being protected (i.e. the same stock, commodity, or interest rate etc.). The position is then established such that a change in the value of the protected-asset, is offset by a change in value of the hedge-instrument. The number of hedge-instruments purchased, will be a function of the relative sensitivity to volatility of the two: the measure of sensitivity is vega, the rate of change of the value of the option, or option-portfolio, with respect to the volatility of the underlying asset. Option traders often seek to create "vega neutral" positions, typically as part of an options trading strategy. The value of an at-the-money straddle, for example, is extremely dependent on changes to volatility. Once neutrality is established, the total vega of the position is (near) zero — i.e. the impact of implied volatility is negated — allowing the trader to gain exposure to the specific opportunity, without concern for changing volatility.
The equity premium puzzle refers to the inability of an important class of economic models to explain the average equity risk premium (ERP) provided by a diversified portfolio of equities over that of government bonds, which has been observed for more than 100 years. There is a significant disparity between returns produced by stocks compared to returns produced by government treasury bills. The equity premium puzzle addresses the difficulty in understanding and explaining this disparity. This disparity is calculated using the equity risk premium: The equity risk premium is equal to the difference between equity returns and returns from government bonds. It is equal to around 5% to 8% in the United States. The risk premium represents the compensation awarded to the equity holder for taking on a higher risk by investing in equities rather than government bonds. However, the 5% to 8% premium is considered to be an implausibly high difference and the equity premium puzzle refers to the unexplained reasons driving this disparity.
Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial loss and uncertainty about its extent. Modern portfolio theory initiated by Harry Markowitz in 1952 under his thesis titled "Portfolio Selection" is the discipline and study which pertains to managing market and financial risk. In modern portfolio theory, the variance (or standard deviation) of a portfolio is used as the definition of risk.
Before the 1921 destruction of Tulsa’s Greenwood District, Black residents had created a remarkable center of business and community life. The district included stores, professional offices, entertainment venues and homes owned by Black citizens. Understanding Greenwood means learning what was built—not only what was burned.
MORE →Joe Louis.