Chapter 5

Fixated on Volatility and the VIX

What Is Volatility, Anyhow?

What is volatility, anyway? It is both a deeply profound yet extraordinarily easy question to answer. We all know what volatility is and yet most of us have difficulty articulating it with any degree of clarity. The arduous quest for a clear, crisp explanation exists largely because volatility can—and does—represent different things to different people and in different contexts. Is it a fear gauge? Is it a statistical quantity? Is it a parameter in an options pricing model? Is it an asset? In fact, volatility is all of these things and probably a great deal more if the truth were known.

Volatility is the most theoretical and yet the most elusive hypothesis—both in the financial ...

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