In the previous post, we presented a system for trading VXX, a volatility Exchange Traded Note. The trading system was built based on simple moving averages. In this post, we are going to examine the time series properties of VXX in more details. The figure below shows the VXX and its 200-day moving average for…Read More Stationarity and Autocorrelation Functions of VXX-Time Series Analysis in Python
Time series analysis is an important subject in finance. In this post, we are going to apply a time series technique to a financial time series and develop an investment strategy. Specifically, we are going to use moving averages to trade volatility Exchange Traded Notes (ETN). Moving averages are used on financial time series data…Read More A Volatility Trading System-Time Series Analysis in Python
We have written many blog posts about the increase in volatility of volatility. See, for example Is Volatility of Volatility Increasing? What Caused the Increase in Volatility of Volatility? Similarly, last week Bloomberg reported, The sudden rise in volatility in February and March showed that even with strong growth fundamentals, financial markets remain vulnerable. Since…Read More Black Swan and Volatility of Volatility
The US equity market just reached new highs, and it broke many records. For example, Bloomberg reported that the US market had not been overbought like this in 21 years. The S&P 500 Index’s superlative start to 2018 is making a contrarian technical indicator look silly. The benchmark gauge is poised to end trading Thursday…Read More Correlation Breakdown
Peter Carr recently gave a talk on volatility trading at the Fields institute. Summary: In general, an option’s fair value depends crucially on the volatility of its underlying asset. In a stochastic volatility (SV) setting, an at-the-money straddle can be dynamically traded to proﬁt on average from the diﬀerence between its underlying’s instantaneous variance rate…Read More Volatility, Skew, and Smile Trading
The volatility index was created more than 30 years ago. Since then it has become a favorite tool for both speculation and risk management. There is now strong evidence that VIX futures and related exchange-traded products are changing the market dynamics. Specifically, in the early days of the VIX, the cash market led the futures.…Read More What Do Creators of the VIX Think of Volatility?
Last Thursday witnessed, again, another dramatic increase in volatility. The volatility index VIX spiked 44 percent to 16.04%, its highest daily close for the year. As shown below, the VIX futures term structure inverted in the short end. Two days before the event, Helen Bartholomew of Reuters warned that the net short position in the…Read More VIX Futures Leads Cash Market: Tail Wags Dog
It happened again, and again. Last Thursday volatility increased sharply at around 1.30 p.m, then it came back to normal at the end of day. For now, we ignore the cause. But this event reinforced our observation: sharp volatility spikes occur more and more frequently these days. In a low volatility environment like this one,…Read More Potential Black Swans and How to Hedge Against Them
Quantitative trading has become a topic du jour lately. Many investors have been considering allocating more capital to quantitative funds. However, not all experts share the same opinion regarding the merits of quantitative strategies. There are even quants among the skeptics. Emanuel Derman is one of the most respected experts in the quant community. He…Read More Do Quantitative Trading Models Work?
In the continuation of the “Low Volatility is Not a New Normal” theme, Adam Samson of Financial Times published another post based on the recent report by JPMorgam which suggested using VIX options for managing the risks. Risk assets, like stocks, have been rallying “for years”, sending market volatility near “record lows… While fundamentally volatility…Read More VIX Options: Should We Buy Them When Volatility is Low?