Last week, JPMorgan issued a report on the state of quantitative investing and the current low volatility environment. The report pointed out that despite the political uncertainties (Comey testimony, UK elections, ECB, geopolitical uncertainty, Qatar etc.), the volatility remains subdued. In fact, in the last 20 years the VIX closed lower than 10 for a…
Read More Low Volatility is Not a New NormalWith the popularity of Exchange Traded Funds on the rise and an exponential increase in short interests in the volatility ETFs, it’s just a question of time that ETF issuers will launch new instruments aiming at the volatility markets in other geographical locations. Indeed, last month, VelocityShares issued 2 new volatility ETFs that allow investors…
Read More VSTOXX European Volatility Exchange Traded Products: EVIX and EXIVLast Wednesday saw a huge increase, in percentage terms, of the volatility indices. The 1M spot VIX increased by 46%, while the underlying SPX index decreased by only -1.8%. As discussed in our previous post entitled Is Volatility of Volatility Increasing?, such a big percentage change in the VIX associated with a “normal” down day…
Read More What Caused the Increase in Volatility of Volatility?In the previous post entitled Relationship Between Credit Default Swaps and Equity Options we discussed about the link between high yield spreads and equity volatility. We also provided an academic reference that formally proved their relationship. Basically, there is a high degree of correlation between the VIX and high yield spreads. Recently, John Lonski of…
Read More Is The Volatility Index VIX Too Low Compared to High-Yield Spreads?In the previous posts entitled Where are the Cheap Hedges for Equity Portfolios? Now Is The Time to Hedge, But The Cost of Insurance Can Be Expensive, we outlined some solutions for finding inexpensive hedges in this low volatility environment. In this post we will continue to explore some more opportunities, and elaborate on additional…
Read More How to Find Cheap HedgesLast week, the volatility index hovered around its lower range. However, the low volatility phenomenon is occurring not only in the equity space, but across the board, from fixed income, to currency, to commodity markets around the world. Still, experts are divided whether this current low volatility is pricing in the risks correctly. Steve Heston,…
Read More “It might be that VIX is fairly priced for the first time, and that risk is fairly low”The asset under management (AUM) of the Exchange Traded Fund (ETF) industry has grown substantially in the recent years. From 2007 to the end of 2016, AUM increased from $851 billion to $3.546 trillion. Investors have been enjoying many benefits, especially the low cost, offered by ETFs as a result of this explosive growth. However,…
Read More Risks Involved When Investing in Exchange Traded FundsLast week, professor and Nobel Laureate Robert Shiller came out with a statement regarding the market high valuation. He referred to the CAPE ratio which is at 29 at the moment and is considered high. However, he also said that the high CAPE ratio does not necessarily mean investors should sell stocks right now. Still,…
Read More Where are the Cheap Hedges for Equity Portfolios?Last week, after the French election, the VIX plummeted and started its journey into the low-volatility regime again. Consequently, volatility selling strategy began gaining traction. However, FT.com published a warning Jim Keohane, the chief executive of the Healthcare of Ontario Pension Plan, compares selling volatility to picking up dimes in front of a steamroller. “You…
Read More Why is Volatility so Low?More and more investors are using the power of computing technologies and quantitative techniques to manage their portfolios these days. They believe that quantitative trading can help reduce the PnL volatility resulted from emotional decision making and thus increase the consistency of returns. However, sometimes the machine beats the man, and sometimes it does not.…
Read More Quantitative Trading: VIX Factor Model and Trend Following