So, the "new normal" is impacting volatility trading, mainly via three effects:
We discussed previously the effect of this on dynamics and skews: all confirmed, and more: it is now common to see the breakdown of "square root of T" termstructure of skew.
In simpler words: in the past you could bet that the slope of the vol-surface at 4 year expiry would be roughly half as steep as the 1 year. Nowadays, on the eurostoxx it can be ~ 1/4.
Yes it sounds nerdish and irrelevant: and it certainly is, when compared to the big macro-themes playing out in this end of year.
But if you are looking at long term strategy on structured products, then it matters - and structured products are now, IMHO, an important long term macro issue, in this deflationary ZIRP world of low demographics.
The details would then make for a long chat - better offline and over coffee. Have a merry XMas, etc etc...
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