QuoteOriginally posted by: twQuoteOriginally posted by: AlanOK, but do you see my point? Regardless of the vote outcome, the UK equity markets will react: call the reaction (percentage) jump [$]\Delta S[$]. So, [$]Q < P[$] suggests the equity market jump will be less negative (or more positive?) if the outcome is Leave vs Remain.In other words, [$]Q < P[$] says to me that [$]\Delta S|L > \Delta S|R[$], where L=Leave outcome, R=Remain outcome, and "|" means "conditional on".Otherwise, if [$]\Delta S|L < \Delta S|R[$], the Leave bet would serve an insurance function and people would bid it up until [$]Q > P[$],just like bidding up the price of an out-of-the-money SPX put. For example, to put some numbers on it, my a priori would have been somethingin the ballpark of [$]\Delta S|L \approx -5\%[$] and [$]\Delta S|R \approx 0[$] (status quo), leading to my puzzle. Or am I missing something?Why do you look at SPX? Do the US markets care enough about Brexit? (IMO they should)One think we looked at was 1week vs 2week maturities for GBP currencies vs. those the SPX.The spread to the expiry before and after the referendum had an obvious spike for UK markets but SPX had no real Brexit effect (this was at the beginning of this week).This was interesting as the rise up in VIX has accounted for by some as a brexit thing which has later maturities.@tw,I mentioned SPX out-of-the-money puts as simply an analogy, not directly related to Brexit. For example, statistically, the [$]P[$]-probability of a >20% drop in the SPX over some short-time horizon is quite small by any reasonable analysis.(This is true all the time, at least post-1987). But the [$]Q[$]-probability of such a drop, as inferred from the put premiums, is persistently much larger. So [$]Q \gg P[$]. This is not unreasonable when most market participants are risk-averse; indeed, if you didn't find that, at a minimum, [$]Q > P[$] (but not necessarily [$]\gg[$]), something would be very wrong with our understanding of risk premiums. @Paul,If the betting is tiny, then agree -- I suppose it can do whatever it wants.On the other hand, not so sure people will so uniformly bet their desired outcome. People do buy fire insurance! As a US resident, I can't bet and don't feel the need to hedge this event anyway.But if I were in the UK, maybe it would look like a bargain equity-drop hedge -- although I suspect the commissions dilute that a lot.
Last edited by Alan
on June 17th, 2016, 10:00 pm, edited 1 time in total.