Volatility as an Asset Class I

I am beginning to believe that to some extent, this blog may be carrying the seeds of its own destruction. Specifically, the worst thing about trading and blogging about volatility is that when stuff hits the fan, the best trading and blogging setups both spike at the same time. So…if sometimes it seems to take longer for me to comment on various market action and volatility-related topics just when these topics seem juiciest of all, well it is probably a case of my trading taking precedence over my blogging.

On that note, let me open a new can of worms that I will come back to regularly and in more detail: volatility as an asset class.

There has been considerable discussion in the past few days about whether or not volatility should be considered an asset class, much of it spurred by a Barron’s article over the weekend authored by Steven Sears and bearing the title Volatility: Finally Getting Respect.

The subject of volatility as an asset class is a fairly complex one and for now I have just enough time and space here to introduce it, provide some links, and promise to be back with some analysis and opinions soon.

Before getting in to volatility, there is another perhaps larger can of worms regarding what exactly an asset class is. I am going to pass on this issue for now, other than to say that I think the Wikipedia asset class examples are an excellent way to think about the subject.

Getting back to volatility as an asset class, this subject has been discussed in some circles for at least the past five years, but the idea has received increasing media attention in the last year or two. The Financial Times was talking about Why Volatility Becomes an Asset Class in May 2006, while Hafner and Wallmeyer published an academic paper Volatility as an Asset Class: European Evidence last year that had been widely distributed in previous incarnations in 2005. Three months ago, a book edited by Izzy Nelken of Super Computer Consulting was published with the title Volatility as an Asset Class. For those who are interested, the book is available through Amazon. To get a sense of how far along this idea has progressed, Euromoney Training was recently offering a training program on the subject of volatility as an asset class.

To complete the laundry list of links, here are four excellent posts triggered by the Steven Sears article from some of my favorite bloggers on the subject of volatility as an asset class:

• ‘Random’ Roger Nusbaum – “Sunday Morning Coffee”
• Adam Warner at Daily Options Report – “Volatility as an Asset?”
• Zero Beta – “Asset Allocation Using Volatility: Is Risk an Asset Class by Itself?”
• Condor Options – “Short Volatility: The New Asset Class?”

More to follow on this subject, as soon as that pesky market volatility takes a bit of a breather…