JEL: C14JEL: G1214 MIN READ•UPDATED SEP 2026
Dynamic Convexity Traps & Regime-Switching Volatility in High-Rate Environments
Author: Kien Pham — Capital & Quant Labs
Liquidity regimes do not transition smoothly. When implied liquidity diverges from realized liquidity, the standard hedging assumption of continuous rebalancing fails, and desks holding what they believe to be delta-gamma neutral books find themselves carrying meaningfully more convexity risk than their models report.
dSt = μSt dt + σ(Rt) St dWt, Rt ∈ { 1, 2 }
Interactive Risk Recalculation
Drag slider to shock implied volatility and simulate tail convexity exposure.
Implied Volatility Shift+25 bps
Simulated Portfolio Impact-1.89%