Volatility is an Instrument of Truth
Regardless of how it is measured volatility reflects the difference between
the world as we imagine it to be and the world that actually exists.
the world as we imagine it to be and the world that actually exists.
Volatility
is your only escape from the
Prisoner’s Dilemma
Hedge
unknown unknowns
and sell
known unknowns
Global Macro Straddle + Asset Beta
Those are a couple of the headers from the conference slide show, pretty wild stuff, interesting graphics too.
45 page PDF
And the verbiage from Artemis Capital Management hosted on Squarespace:
Volatility and the Allegory of the Prisoner’s Dilemma
False Peace,
Moral Hazard,
and
Shadow Convexity
Dorothy Thompson once said “peace is not the absence of conflict. Never forget here is a form of peace and stability reinforced by a foundation of underlying volatility. Game theorists call this the paradox of the Prisoner’s Dilemma, and it describes a dangerously fragile equilibrium achieved only through brutal competition. The Prisoner’s Dilemma is the most important paradigm for understanding shadow risk in modern financial markets at the pinnacle of a multigenerational debt cycle unparalleled in the history of finance....MORE, so much more (52 page PDF)
In their masterwork tapestry entitled “Allegory of the Prisoner’s Dilemma” the artists Diaz Hope and Roth visually depict a great tower of civilization that rests upon a bedrock of human cooperation and competition across history. The artists force us to confront the fact that after 10,000 years of human civilization we are now at a crossroads. Today we have the highest living standards in human history that co-exist with an ability to destroy our planet ecologically and ourselves through nuclear war. We are in the greatest period of stability with the largest probabilistic tail risk ever. The majority of Americans have lived their entire lives without ever experiencing a direct war and this is, by all accounts, rare in the history of humankind. Does this mean we are safe from the risk of devastating conflict on our own soil ? In 1961, at the height of the Cold War, a B-52 bomber carrying two Mark 39 thermonuclear bombs accidentally crashed in rural North Carolina. A low technology voltage switch was the only thing that prevented a 4-megaton nuclear bomb with 250 times the yield of the bomb dropped on Hiroshima from detonating on American soil. In addition to killing everyone within the vicinity of the blast, the winds would have carried radioactive fallout over Washington D.C., Baltimore, Philadelphia, and New York City (1) . It is not inconceivable to imagine that, at the height of cold war, a weapon of that magnitude exploding randomly on the eastern seaboard would have triggered immediate accidental retaliation against the Soviets resulting in full scale Armageddon and the end of humankind as we know it. This is just one of many nuclear accidents during the cold war . Peace has a dark side. Peace can exist due to hidden conflict in the Prisoner’s Dilemma.
Global Capitalism is trapped in its own Prisoner’s Dilemma; forty-four years after the end of the Bretton Woods System global central banks have manipulated the cost of risk in a competition of devaluation leading to a dangerous build up in debt and leverage, lower risk premiums, income disparity, and greater probability of tail events on both sides of the return distribution. Truth is being suppressed by the tools of money. Market behavior has now fully adapted to the expectation of preemptive central bank action to crisis creating a dangerous self-reflexivity and moral hazard. Volatility markets are warped in this new reality routinely exhibiting schizophrenic behavior. The tremendous growth of the short volatility complex across all assets, combined with self - reflexive investment strategies, are creating a dangerous ‘shadow convexity’ that will fuel the next hyper - crash. Central banks in the US, Europe, Japan, and China now own substantial portions of their own bond or equity markets. We are nearing the end of a thirty year “monetary super - cycle” that created a “debt super-cycle”, a giant tower of babel in the capitalist system. As markets now fully price the expectation of central bank control we are now only one voltage switch away from the razors edge of risk. Do not fool yourself - peace is not the absence of conflict – peace can exist on the very edge of volatility.
Prisoner’s Dilemma describes when two purely rational entities may not cooperate even if it is in their best interests to do so, thereby replacing known risks for unknown risks. In an arms race when two superpowers possess the ability to destroy each other, the optimal solution is disarmament and peace. If the superpowers do not trust one another completely, the natural course of action is proliferation of conflict through nuclear armament despite great peril to all. This non - cooperation, selfishness, and conflict, ironically results in an equilibrium of peace, but with massive risk....
Genius or lunatic, you tell me:
TABLE OF
CONTENTS
VOLATILITY AND THE ALLEGORY OF THE PRISONER’S DILEMMABefore you answer, here's the intro to May 18's "VIX Surge Is Unwelcome Lesson in Duplicity of Volatility Wagers"--UPDATED:
MORAL HAZARD IN THE PRISONER’S DILEMMA
COSMOLOGY IN THE PRISONER’S DILEMMA
RISK CONTROL IN THE PRISONER’S DILEMMA
CONVEXITY AND THE PRISONER’S DILEMMA
SHADOW SHORT CONVEXITY IN THE PRISONER’S DILEMMA
BLACK SWANS IN THE PRISONER’S DILEMMA
MODERN PORTFOLIO THEORY IN THE PRISONER’S DILEMMA
CONVEXITY EXPOSURE IN THE PRISONER’S DILEMMA
EQUITY VALUATIONS IN THE PRISONER’S DILEMMA
YIELDS IN THE PRISONER’S DILEMMA
STOCK AND BOND CORRELATIONS IN THE PRISONER’S DILEMMA
VIX IN THE PRISONER’S DILEMMA
SHORT VOLATILITY IN THE PRISONER’S DILEMMA
DEBT IN THE PRISONER’S DILEMMA
INCOME INEQUALITY IN THE PRISONER’S DILEMMA
DEMOCRACY IN THE PRISONER’S DILEMMA
ESCAPE FROM THE PRISONER’S DILEMMA
EPILOGUE TO THE PRISONER’S DILEMMA
APPENDIX CINEMATIC CONVEXITY
ALLEGORY OF THE PRISONER’S DILEMMA TAPESTRY KEY AND ARTIST COMMENTARY
FT Alphaville's Izabella Kaminska used to talk with Chris Cole of Artemis Capital about volatility but I haven't seen him mentioned in a while. What he's up to is on a whole different level from the usual. Here's an example: The shadow convexity risk in the machine (and the VIX)Or 2014's "An Awful Lot of People Are Shorting Volatility (VIX; VXX; XVIX; XXV)":
I'm starting to wonder if Izabella likes posting on volatility because, in addition to talking to Chris Cole who is pretty sharp, the ETP symbols read like Roman numerals?But, instead of listing our links to FTAV, you can go directly to the source:
As to the headline, I mean "awful lot" in both the colloquial and the literal....
site:https://ftalphaville.ft.com Chris Cole
And while I attempt to synthesize these concepts, here's a 1992 Mack Daddy beat:
Baby Got Black (Swan)Genius or madman?
(With apologies to Sir Mix-a-Lot)
I like… fat… tails and I cannot lie
You vol sellers can’t deny
When a hot trend breaks with a well-timed stop
and a great big black swan pop you get
Paid… P&L year gets made
‘Cause you noticed that trade was packed
Buncha mean reversion suckers got jacked
Oh baby I wanna get lumpy
Long gamma for when it gets bumpy
Central banks tried to haze me,
But those carry trades just don’t faze me!...MORE
