When you read this article you understand why Barclays is losing their shirt....
Volatility is only up because of hedging ? Where does volatility come from then? The Sky? or is it not the UNCERTAINTY about future path for economic numbers which create financial volatility.
Volatility is not a derivative of the financial market alone, its more a function of the UNKNOWN path rates, inflation and growth takes - so according to Barclays vols should go down in January, I, on the other hand, I, the farmers son, think they will go up.
Never in my time as a trader has there been more INSECURITY and UNCERTAINTY around.. hedging ? My foot..
Happy Holidays to you all and may the trading Gods be with you in 2008.
The Short View
By Gillian Tett
Published: December 20 2007 02:00 | Last updated: December 20 2007 02:00
Christmas is the season to watch reruns of old movies. But even before the holiday starts, financial markets are getting into this spirit.
Never mind that analysts are now muttering darkly that 2008 could produce stagflation - a concept that, until recently, seemed as dated as The Sound of Music . In the equity markets, another oldie is now back on investors' radar screens: equity market volatility.
Until recently, this was an issue that investors generally ignored, since volatility has been extraordinarily low in recent years. But in recent months, volatility indices have soared, both in terms of tangible market swings (measured as realised volatility) and in terms of the cost of buying insurance against these market swings (measured by so-called implied volatility). Indeed, the change of mood is so marked that volatility measures tracking volatility have leapt too.
So is this rerun back to stay? In the short term, perhaps not. Barclays Capital thinks that one reason implied volatility (or hedging costs) has risen this autumn is that investors have been trying to reduce their levels of risk, by hedging the equity positions they hold.
However, risk-averse behaviour typically peaks at the end of year, when investors square accounts. Thus Barclays suspects hedging activity will fall next month, prompting a temporary downturn in the implied volatility indices.
But in the longer term, there are signs that volatility is "entering a new regime", as Deutsche Bank says. After all, if you think that credit markets are even half-right in their current levels of gloom, equity prices look too high. That suggests implied equity volatility levels will probably start rising again once the January impact ebbs away. Savvy investors who want to hedge their equity positions might be wise to do this as soon as hangovers clear on January 1.
Med Venlig Hilsen | Yours Sincerely
Steen Jakobsen, Chief Investment Officer, Saxo Fund Management
Saxo Bank A/S -London
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Phone: +44 (0)207 151 2010 | Fax: +44 (0)207 151 2001
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