Suppose the volatility of markets is a proxy for the emotional volatility of marketplace position participants. In an ultra depression volatility market, zilch is moving really much. There’s non much to larn excited or worried about. In an ultra high volatility market, things are moving much to a greater extent than than normal. That is an environs ripe for fear, greed, uncertainty, overconfidence, in addition to underconfidence.
So what is the emotional significance of the volatility of volatility? When volatility itself becomes volatile, emotional stability is itself unstable: nosotros swing abnormally betwixt calm in addition to arousal. It may good live on the illustration that the volatility of volatility is to a greater extent than of import to performance–market surgical procedure in addition to trading performance–than volatility per se. If nosotros are inward a stable volatility regime, nosotros tin arrange to depression or high levels of marketplace position movement. But if volatility itself is moving around, adaptation becomes far to a greater extent than tricky.
Above is a volatility of volatility mensurate based upon pure volatility (volatility per unit of measurement of trading volume) from November, 2013 to the present. Note how nosotros are inward a far unlike vol of vol authorities than inward the recent past. This besides shows upwardly on traditional measures of volatility of volatility, such every bit $VVIX.
When pure volatility is inward its lowest quartile in addition to volatility of volatility is low, the adjacent iii days inward ES convey averaged a loss of -.25%. When pure volatility is inward its lowest quartile in addition to vol of vol is high, the adjacent 4 days inward ES convey averaged a loss of -.02%.
When pure volatility is inward its highest quartile in addition to vol of vol is low, the adjacent iii days inward ES convey averaged a loss of -.27%. When pure volatility is inward its highest quartile in addition to vol of vol is high, the adjacent iii days inward ES convey averaged a *gain* of +.77%.
Like I said, it may good live on the illustration that vol of vol–and non simply volatility–is primal to marketplace position surgical procedure in addition to trading performance. When nosotros convey had volatile markets in addition to volatility itself has been volatile, those markets convey provided the best upside returns.
Do nosotros convey ways of adapting, non solely to volatility, but to volatility of volatility? In our trading? In our self-management?
New promising answers come upwardly from quest new, promising questions.
Further Reading: Pure Volatility