Equity volatility: Betting on turbulence
Dealers report that liquidity in the variance swaps market held up well amid recent equity market turbulence. Equity volatility might finally have matured to the point where it is an asset class in its own right. John Ferry reports.
Equity market volatility in advanced economies shot through the roof when the credit and liquidity crisis kicked in last year and has been high ever since. It might have been expected then that the variance swaps market, which in the past has suffered its own liquidity gluts because the market is historically prone to one-sided trading, would also have gone into lock-down mode.
But that wasn’t the case. Dealers say the market, which enables investors to take exposure to equity market volatility, continued to function relatively smoothly, with buyers and sellers of volatility operating consistently throughout the third and fourth quarters of last year, and they say it has continued to do so since.
"The fact that the variance market behaved as we would have hoped was good news and showed that people now rely on variance to exchange risk," says Antoine Godin, head of investor structured solutions in Europe at JPMorgan in London, adding that there are now enough people operating in the market to maintain consistent buy and sell liquidity.