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Skewed

1. When did people first start to begin their emails with “Good morning” or “Good afternoon”? It suggests that you’re going to pay attention to the missive as soon as it arrives, another step in the morphing of email from letter to phone call.

2. I was at the Global Derivatives conference in Paris, and thinking about stochastic volatility, motivated in part by an old talk by Peter Jaeckel that someone emailed me. There’s no doubt that volatility IS stochastic, and that the models are elegant, but does it explain the smile, in particular the equity index smile?

Jaeckel points out how many of the economic causes of the smile in FX, equity and interest rates in particular, are related to what I think of as violations of scale invariance rather than the correlation between an asset price and its volatility. There is a more or less absolute meaning to ‘low’ and’ high’ for interest rates, as intuited by both crowds and the Fed. And for FX and equities, though they may be scale invariant in the long run, during each short-term period ‘low’ and ‘high’ have meaning too, a meaning imparted by investors, central banks and governments. There is something vaguely local about all of this.

Published in Models