Felix Salmon is doubtful about whether it is possible to hedge tail risk, and I wholeheartedly agree with the data he cites showing that, of eight major asset classes, only volatility and managed futures offer genuine non-correlation to market returns. In fact, I’ll go a step further: I’m not that enthusiastic about the benefits of managed futures, at least in their current form. As a registered commodity trading advisor, I’ve seen the sorts of strategies that most of…
It is a relatively simple matter to backtest a strategy trading price-based expectations: a little spreadsheet know-how or, failing that, any of the scores of software packages now on offer will get the job done. But testing the historical performance of well-defined options strategies involves much more complexity, and imposes significantly greater data requirements. The difference between stocks/futures/forex and options is so great, in fact, that no retail platform today offers a straightforward way to run thorough tests of quantitative…
If you hold a position larger than a specified threshold in a futures or options contract that is regulated by the CFTC, your clearing firm must report it and classify your position as either commercial or non-commercial (I prefer the clarity of the old “hedging vs speculative” language, but whatever). Futures traders have been tracking these reports for years, but I’m not aware of any studies that analyze the history of VIX futures commitments, with the exception of a…
Some people regard the bond market as the most mature financial market, providing discipline and stability where stock operators merely exhibit fear and greed. I’m not out to settle any internecine disputes here, but I do want to examine a strategy premised on the view that behavior in the bond market might tell us something useful about the equity market.
Conventionally, investor preference for higher yield correlates with a positive overall economic outlook. Brett Steenbarger looks at this phenomenon…
I propose the following rule of thumb for VIX interpretation:
If you think some VIX movement entails a proposition p and movement in the other volatility indexes VXN, RVX, and VXD doesn’t entail p, you shouldn’t believe p.
Why accept this rule? Because equity indexes are highly correlated, especially over the very short term, and volatility indexes are calculated using the same methodology, such that in the case of a divergence of one volatility index from the others,…
Wednesday, July 14, 2010
12 Comments