re : var let ' s meet at 4 : 00 .
vince j kaminski
06 / 01 / 2000 09 : 19 am
to : john arnold / hou / ect @ ect
cc : vince j kaminski / hou / ect @ ect , tanya tamarchenko / hou / ect @ ect , jim
schwieger / hou / ect @ ect , jeffrey a shankman / hou / ect @ ect
subject : var
john ,
we have been working for the last few days on var related issues .
the focus is on jim schwieger ' s storage book as of 5 / 25 and 5 / 26
where we had some counterintuitive results . this book is a good
candidate for a systematic review of the var process .
it seems that the problem arises from forward - forward vols used by the var
system . you can see in the attached spreadsheet that the var , on a cumulative
basis ,
jumps on jan 04 , when an abnormal ff vol hits a relatively large position .
this ff vol is also much different from the previous day number producing a
big
jump in var .
this row ( jan 04 ) is in magenta font in the attached spreadsheet . please , look
at column d .
the abnormal ff vol may result from one of the two factors :
a . a bug in the code . we are working with the person in it who wrote the
code to review it .
b . a poorly conditioned forward vol curve ( a kink or discontinuity in
the fwd vol curve will do it ) . one solution i can
propose , is to develop for
the traders a fwd - fwd vol generator allowing them to
review the fwd vol curve
before it is posted . if it produces a weird fwd - fwd vol ,
it can be smoothed .
can you meet at 4 p . m . to review our findings ?
vince