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Your still kinda talking in circles. I'm agreeing that 1997 is the year
when we see a decoupling. The reason is exactly as you
describe..technology has heightened the elbows and assholes
impact.....that is why implied spikes.
Even if 97 were to close lower than 1996(not a forcast) I'm still not
certain that...unless we could point to a dirrect effect(like dynamic
hedging was in 87)we could draw a vol analogy.
However there is huge problem with regressing implied vol to price over
the short run. I'm not convinced that you aren't in effect looking at
the same thing two different ways. I suspect that if there were a
downtick rule for listed stocks vs the uptick rule the relationship
would be exactly the opposite.
Implied is really a measure of actual vol plus a whole series of non
statistical inputs relating to supply/demand..ability to
hedge....proximity to breakers on the S & P and NYSE....short term
psychology and stuff non of us can really calculate.
What would be extremely interesting would be to look at the spread
between actual and implied(not historical and implied)and discover if as
the difference widened was that occurance bullish or bearish.
If you look at volatility forcasts(GARCH). You find that a few firms
have actually gotten very good a projecting future vol. Now if I can
project a future vol I can actually project a future price distribution.
So these forcasts have become very profitable for pure vol
traders...they have been benefical to price traders. I would expect
that they would also be VERY VERY valuable to cash traders(I've heard
they are actively being used in FX markets by the cash/forward folks but
I really don't know about how successful they have been.
The next chance I get to put my hands on a LIM or a David Bruce I'll try
to determine if a simulation can be done.
I would bet that prior to the mid 90's the relationship was
inverse.....spread widens market declines. What will be curious is if
it continues to be the case. Where is Blair Hull when you need him?
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