On Black Monday in 1987, the Dow fell 23%. Other markets fared worse. Many observers concluded part of the blame lay with program trading and portfolio insurance – a way of hedging against equity losses using derivatives. Now, equity portfolio hedging is all the rage again, using volatility instruments. One esteemed quant believes the volatility craze is sowing the seeds of the next humongous crisis. Theo Casey investigates.
Eckhard Platen is today what Nouriel Roubini was before the subprime crisis.
He’s a deep out-of-the-money put option. Almost certainly wrong, but if he’s right he’s the one thing that might save us.
Platen has a theory you’re not going to like. He claims that the investment banks issuing volatility products may bankrupt themselves. By extension, the hedge funds and pension funds that buy and hold volatility products as hedges may incur large losses. I did...