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We are facing extreme volatility.
There's only one thing harder than living in a home with an adolescent - and that's being an adolescent. The moodiness, the volatility, the wholesale lack of impulse control, all would be close to clinical conditions if they occurred at another point in life. In adolescence, they're just part of the behavioral portfolio.
Global warming creates volatility. I feel it when I'm flying. The storms are more volatile. We are paying the price in more hurricanes and tornadoes.
Investors have few spare tires left. Think of the image of a car on a bumpy road to an uncertain destination that has already used up its spare tire. The cash reserves of people have been eaten up by the recent market volatility.
My sense is that economic anxiety means electoral volatility.
Fear tends to manifest itself much more quickly than greed, so volatile markets tend to be on the downside. In up markets, volatility tends to gradually decline.
Alan White and I spent the next two or three years working together on this. We developed what is known a stochastic volatility model. This is a model where the volatility as well as the underlying asset price moves around in an unpredictable way.
Briefly speaking, our conclusion is that stochastic volatility does not make a huge difference as far as the pricing is concerned if you get the average volatility right. It makes a big difference as far as hedging is concerned.
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