KOREAN AUTOCALLABLES AND THE MISPRICING OF VOLATILTY

The presence of autocallables cause volatility to be mispriced. The end of autocallables will lead to a repricing of volatilty.

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The autocallable market is a market born from low interest rates. Korea has become the mecca of equity linked autocallables. Korean issuance of autocallables began in earnest in 2012.

As short dated Korean bond yields, fell through 3% in 2012 issuance picked up. As a typical yield on a Korean autocallable is 5%, I wonder if the recent rise in yields above 3% could see autocallable issuance fall?

The short answer is that if autocallable issuance falls, then implied volatility will rise. Why? Autocallables are best understood as a distributed portfolio insurance market. What does that mean?

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