Tuesday, April 14, 2015

options - Why is short term implied volatility typically higher?


Why do short term implieds move more than long term?



Answer



Implied volatility represents the market expectation of "stuff happening in the future". Over long periods, all that stuff tends to cancel out a bit, so long-term vols are much more stable. In the short term, a single news item may be enough to drastically increase (or decrease) return uncertainty.


From a quant point of view, we think of volatility as "mean-reverting".


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