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Part I
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Volatility
Volatility
Medium
During a market crisis, the term structure of implied volatility for equity index options shifts from upward sloping (1-month: 16%, 1-year: 21%) to downward sloping (1-month: 38%, 1-year: 24%). Which explanation best accounts for this shift?
A
Volatility mean-reversion expectations: the market expects the current elevated volatility to revert toward a long-run average, so long-dated vol rises less than short-dated vol
B
Increased demand for long-dated puts during the crisis pushes up long-term implied volatility disproportionately
C
The shift is caused by the VIX index mechanically dragging down long-term volatility
D
Short-dated options have lower liquidity during crises, causing artificial price spikes
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Tags
#term-structure-volatility
#mean-reversion
#volatility-crisis
#implied-volatility
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