Christopher Cole who is a Managing Partner at Artemis Capital Management kicked off the final day of the 5th Annual European of CBOE’s Risk Management Conference. He gave his view of the current market environment while also framing the discussion around a paper he authored, Volatility and the Allegory of the Prisoner’s Dilemma. A PDF of that paper may be found here – Cole Volatility paper
I was fortunate enough to see Chris speak on this paper in the past. Although he presented this topic to a similar audience, he had several different points to make and included several entertaining analogies over the course of his talk. He invoked broad images, spanning the character from the movie Ant Man to referring to the equity market having Jekyll and Hyde periods with respect to volatility.
A point I found particularly interesting was the impact that the equity market feels from corporate buybacks. He called what is going on in the US a leveraged buyout of the S&P 500. He mentions that never in history have we had a market have a bull run on falling volume, but that is exactly what is currently going on. The reason stock trading volumes are declining is because there are fewer shares available to trade. His feeling is this trend will eventually end badly for the US equity market.
He mentioned that the equity markets go through Dr. Jekyll and Mr. Hyde phases. Mr. Hyde, the calm persona, occurs when companies are allowed to buy back shares. In periods where companies are prohibited from buying back shares, such as leading up to an earnings announcement, the market tends to be more volatile, hence the reference to Dr. Jekyll.
As a final note, Chris commissioned a video, “Volatility at World's End” which is a visual look at SPX volatility from 1991 through 2011. It is an entertaining reminder of what the markets went through about 8 years ago. That may be viewed at the following link - https://youtu.be/xlKWdd_DhW0