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This piece was contributed by David Shin, Associate Director, PAAMCO Singapore

The volatility of volatility is generally higher in Asian markets than in other developed markets. Also, Asian markets typically have skews much lower than those in the West, and we believe a key reason for this is the plethora of structured products sold in the region.

While there are many types of option-linked structured products, some of the most widely issued products in the region are notes designed by bankers to pay a slightly higher yield under "certain conditions." Volatility is often referred to as the "investor fear gauge" as it is generally higher in times of distress.

In the last 15 years there have been several panic situations: the Asian Crisis in the late 90s, the demise of the tech bubble in the early 2000s, the SARS scare in Asia in 2003, and most recently, the global financial crisis of 2008. All these large distress events led to episodes of increased volatility (in some cases radically so). It has been a little less than five years since the last "big event" and volatility levels have reverted to near pre-crisis lows, even though there are still several macro risks and the economies of many developed and developing countries look weak. This drop in volatility can be partially attributed to the provision of liquidity by central banks around the globe to many investors who, in search of yield,......................

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