Event Vol Isolation · Desk

How the Deconstruction Works

Variance additivity, an estimate for each scheduled event, and a little subtraction. The full recipe — and where the assumptions live.

Event Volatility Isolation rests on one clean principle and a few careful estimates. Here is each step.

Variance additivity

Volatilities don't add, but variances do for independent contributions over non-overlapping time. The total variance the option market prices over a window of T days is the diffusive variance over those days plus the summed variance of each scheduled event inside the window:

Event variance estimation

Each scheduled event — FOMC, CPI, PCE, NFP, earnings — is assigned an expected event variance: the extra one-day variance the market prices for that catalyst. It is estimated from the size of historical (and option-implied) moves around that type of event for that underlying. The bigger and less predictable the typical move, the larger the variance chunk it contributes.

Diffusive volatility — the subtraction

With the event variances estimated, the diffusive (event-stripped) vol falls out by subtraction: take the total variance implied by VolDex®, remove the summed event variances, divide by the time in the window, and take the square root. What remains is the baseline volatility — the regime vol with the scheduled catalysts removed.

Does the tenor span the event?

An event only contributes if it falls strictly inside the option's life. The tool checks each scheduled event's date against the chosen 7- or 30-day tenor and includes only those that the tenor spans. An event one day past expiration is excluded; one just inside is counted in full. This guard is what keeps the deconstruction honest at the window's edges.

Limitations

The framework is an estimate, not a measurement. Event variances are modeled from history and implied moves, not observed directly; the additivity assumes the contributions are independent and the events are the scheduled ones it knows about; and an unscheduled shock will show up in the diffusive baseline because it isn't on the calendar. Read the deconstruction as a well-grounded attribution of implied vol, not an exact accounting.

How it maps to the Nations suite

The deconstruction's input and output are both about VolDex®. VolDex® supplies the total; the event-stripped baseline is the cleaner version of it to feed the cones (rich vs realized history) and the VRP (rich vs the move that follows). Stripping the scheduled noise makes every downstream comparison sharper.

Educational content from Nations Indexes. VolDex® is a registered mark of Nations Indexes. Event variances are modeled estimates; the additivity framework assumes independence and known scheduled events. Nothing here is investment advice.