Volatility surge and linked-product shock
2018.02.05
A volatility surge and rebalancing in inverse-volatility products interacted to amplify losses.
US trading date. Product termination was a subsequent measure.
Conditions at the time
Prolonged low volatility encouraged growth in products and positions betting on falling volatility.
How events unfolded
On 2/5, equity declines and a VIX surge caused inverse-volatility product values to collapse.
Stakeholders and impacts
ETP managers, futures traders and investors holding these products were affected.
Information available at the time
Possible increases in US inflation and rates were major concerns in risky-asset markets at the time.
Findings confirmed later
The BIS analyzed how daily rebalancing increased demand for volatility futures near the close.
Alternative interpretations and limitations
Distinguish the start of equity declines from the mechanisms through which derivatives amplified volatility.
Source-based context and interpretation
BIS researchers described daily rebalancing by leveraged and inverse volatility products increasing futures demand and amplifying the spike. Small asset size did not ensure small market impact. They explicitly cautioned that these structures did not represent the entire ETF market. ASSETCASTING interpretation: Tracking targets and rebalancing rules matter more than labels. Large price changes can force additional trades in the same direction. Distinguish futures, leverage and issuer-credit exposures rather than extending the result to every ETF.
Evidence coverage through 2018-03-11 · Sources checked 2026-10-14
Related events and periods1
- Financial-crisis response and unconventional monetary policy
An event or period whose recorded start falls within this editorial interval. This does not establish that it caused or represents the characteristics of the era, nor guarantee that the entire period falls within the interval.
Historical events do not guarantee future recurrence or investment performance.