Implied volatility in the Japanese equity market has fallen to seven-year lows in recent weeks on the back of strong appetite for structured products, which short volatility. "Volatility has been moving downwards due to large amounts of domestic distribution," said Thibault Delahaye, head of equity derivatives trading at BNP Paribas in Tokyo.
Japanese investors have been selling puts on equity indices, including the Nikkei 225, to pick up premium because they feel the downside risk is limited. Such plays, coupled with falling volatility globally has caused six-month implied vol to fall around 17% after averaging over 20% in recent years. "You'd have to go back to 1997 to get lower levels and before that was probably during the Barings Bank crisis [in 1995]," said a senior equity trader.
Several traders, however, believe the levels have bottomed out and buying interest is returning. "We'll start to see more hedge fund flows materialize in the coming weeks," said Delahaye.
