Volatility as an emerging asset class.

Abstract

This paper aims to offer an analysis on volatility and its future development as an important asset class. Nowadays, the volatility is not only perceived as a statistical asset’s risk measure but also as an asset itself on which you can speculate, trade and hedge your portfolio. In fact, since the last two decades the volatility has been traded OTC through variance/volatility swaps and has spread over exchange traded markets through volatility indexes such as VIX along with others. The first chapter of this paper introduces a brief historical excursus on stock markets volatility, explains modern financial volatility measures and introduce to the relationship between volatility indexes and central banks economic policies. Moreover traded volatility indexes on CBOE are described and VIX structure is analysed. The core research is conducted through a deep outline on the main central banks monetary policies and their consequences on the traded stock indexes as well on theirs derived volatility indexes. The main intuition of the author consists in the establishment of the relationship among central banks policies and theirs effect on the real economy (through GDP analysis) and financial markets volatility. This research has been conducted on US and EU central banks policies analysis over the last 6 years and the response of the financial markets and their volatility indexes to the monetary stimulus. In the conclusion of the chapter some important results will be illustrated. In the last chapter the future volatility perspectives are proposed. Firstly, the postmodern perspective is presented and the cost of the modern volatility hedging is discussed. Furthermore, few possible future scenarios such as “bull market in fear” and hyperinflation are examined. In the conclusion, the development of the volatility as an independent asset class will be outlined.