The fine structure of volatility feedback II: overnight and intra-day effects

21 Dec 2015

Article by: Pierre Blanc, Remy Chicheportiche, Jean-Philippe Bouchaud
Date: 21 May 2014

“We decompose, within an ARCH framework, the daily volatility of stocks into overnight and intraday contributions. We find, as perhaps expected, that the overnight and intraday returns behave completely differently. For example, while past intra-day returns affect equally the future intraday and overnight volatilities, past overnight returns have a weak effect on future intra-day volatilities (except for the very next one) but impact substantially future overnight volatilities. The exogenous component of overnight volatilities is found to be close to zero, which means that the lion’s share of overnight volatility comes from feedback effects. The residual kurtosis of returns is small for intraday returns but infinite for overnight returns. We provide a plausible interpretation for these findings, and show that our Intraday/Overnight model significantly outperforms the standard ARCH framework based on daily returns for Out-of-Sample predictions.”

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Posted in Realized volatility


Alternative Risk Measures and Stock Selection

07 Jun 2015

Article by: Euan Sinclair, Saarthak Gupta
Published by: Social Science Research Network
Date: 2 Apr 2015

“Uncertainty is generally avoided when investing. Volatility is a popular proxy for investment uncertainty, and indeed low volatility stocks outperform high volatility stocks. However, there are also many other possible measures of uncertainty, among which are entropy and the Hurst exponent. Here we show that these measures also predict groups of stocks that outperform.”

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Posted in Realized volatility


Stock return variances: The arrival of information and the reaction of traders

01 May 2015

Article by: Kenneth R. French, Richard Roll
Published by: Journal of Financial Economics
Date: 1986

“Asset prices are much more volatile during exchange trading hours than during non-trading hours. This paper considers three explanations for this phenomenon: (1) volatility is caused by public information which is more likely to arrive during normal business hours; (2) volatility is caused by private information which affects prices when informed investors trade; and (3) volatility is caused by pricing errors that occur during trading. Although a significant fraction of the daily variance is caused by mispricing, the behavior of returns around exchange holidays suggests that private information is the principle factor behind high trading-time variances.”

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Posted in Trading ideas


Dispersion – A Guide for the Clueless

28 Mar 2015

Article by: FDAXHunter
Published by: Capital Structure Demolition LLC
Date: Jul 2004

“Once upon a time dispersion trading desks used to be the kings (and queens) of volatility trading in the equity arena (if we ignore the 35 mio USD short vega position by LTCM).

“Dispersion desks can handle significant volatility risks in the same way that a basket desk can handle extremely large deltas per instrument or a cap/floor vs. swaption trader can handle extremely large volatility risks per underlying. As a matter of fact, a dispersion trader is essentially a cap/floor vs. swaptions trader, albeit somewhat less structured. Dispersion traders can come into a single stock and sometimes sell signifcant vegas (read: millions) before anyone knows what is happening.”

Full article (PDF): Link

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Posted in Realized volatility

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