Suppose that the average one year implied at-the-money volatility of the sub sector indices making up the BCOM is at 20% and that the sub sectors are uncorrelated. Bearing in mind the effect of correlation in tail risk scenarios, would you expect the one-year at-the-money volatility of the BCOM to be higher or lower than the average of the sub sector volatilities (20%)?

  • $\begingroup$ Can you clarify your question: are you interested in the implied vol of BCOM under the assumption that the subsectors are uncorrelated (sentence 1 of your question) or correlated (sentence 2 of your question)? $\endgroup$ – Bram Dec 7 '15 at 16:30

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