Can someone explain the "vanna decay" story? I am looking for something at least somewhat logically consistent (not even asking for a model cause I gave up on that).
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Ok, thanks, not exactly my question but to your point: can you walk me through a "verbal" impulse response functions and tell me some identifying assumption to belive the vanna hedging *causes* prices to go down. Suppose we start from an equilibrium. What is the causality story?
It would be something like “implied vol goes up” (because someone buys options or whatever, doesn’t matter) which means dealer delta increases (assuming they are long vanna) which means they need to hedge by selling spot, and selling spot causes the price to go down.
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Honestly feel like I must be missing something because you surely understand this already! What’s the part you take issue with? It must be either the initial step (my “or whatever”) or the final step, everything else is purely mechanical.
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Ehhhhh it's a good document but has some dubious bits -- e.g. the chart showing that volatility is high when gamma exposure is low. Presented as if low gamma exposure is *causing* realized vol to be low but in fact it's the other way around, high realized vol causes high implied
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