[youtube https://www.youtube.com/watch?v=h4Y26D3LmrE?rel=0]

The paper titled, “The imprecision volatility indexes”, analyzes VVIX, the vega weighted VIX, an estimate for the 30 day expected volatility. Market participants have always wanted some kind of quantitative measure for the volatility. CBOE introduced VIX based on the Black Scholes volatility of ATM options and later changed it to a method that is based on observed option prices. The latter method in the finance literature goes by the name, “model free method”, because it uses a replicating portfolio argument of pricing a variance swap.

In every elementary statistics textbook on inference you will find the following question How to draw an inference on a correlation estimate between two variables ? An inverse hyperbolic tangent transformation is applied to the correlation coefficient, which then is shown to be distributed as a normal random variable.This transformed variable is then used to compute confidence intervals on the original scale. If one is curious, a natural follow up question would be,

The paper titled, “Extracting Model-Free Volatility from Option Prices: An Examination of the VIX Index”, is a very interesting paper that talks about the problems in the VIX index computation that is currently being used at CBOE. Other stock exchanges throughout the world are also following a similar method for disseminating VIX, called the fear index. One of the most interesting conclusions of the paper is this : VIX underestimates the true volatility in times of panic, i.

It’s truly a great pleasure for me to be at the University of California at Berkeley today. Not quite 50 years ago, when I was an undergraduate studying physics in Cape Town, I began applying to go to the United States for graduate school. It seemed to be the right thing to do if you were serious about your field. So I applied to three schools: Columbia, because I knew someone in Cape Town who had just gone there, and because it was in New York City; Caltech, because Feynman was there and had recently been awarded the Nobel prize and also published the stylish and insightful Feynman lectures on physics, though I didn’t understand at the time what he had actually accomplished; and Berkeley, because it was in the news for the start of the revolts against arbitrary authority on campus.