Archive for the ‘Investing ideas’ Category

VolContract Futures Overlay on an S&P 500 Portfolio

08 Nov

Article by: Sixiang Li
Published by: The Volatility Exchange (VolX)
Date: Oct 2012

“The Volatility Exchange™ (VolX®) plans to launch futures and options contracts based upon the realized volatility of U.S. equity indices. The futures version is named VolContract™ futures (VCs), which settle to the VolX indices known generically as RVOL™. The concept is both similar and dissimilar to the popular VIX® index and products marketed by the CBOE®. The two versions are similar in the notion that both VolX and CBOE are trying to provide volatility products to the marketplace. They are dissimilar because the VIX index and consequently VIX futures are based on implied volatility (the relative cost of options) while the RVOL index and consequently VCs are based on realized volatility (the actual, historical movement of the underlying index). VolContract futures are exchange‐tradable instruments that function similarly to a forward‐starting over‐the-counter volatility swap. They are expected to be launched on U.S. equity indices in 2013 and will come in two varieties: a 1‐month calculation period of realized volatility (1Vol™) and a 3‐month calculation period of realized volatility (3Vol™). For a detailed description of how these new instruments work, please visit the web site of The Volatility Exchange at The goal of this paper is to demonstrate how a VC overlay can enhance the return and/or reduce the standard deviation of an equity portfolio. We chose the S&P 500 Total Return Index on the assumption that VolX will roll out products based upon this index.”

Full article (PDF): Link


Is the Potential for International Diversification Disappearing?

04 Apr

Article by: Peter Christoffersen, Vihang Errunza, Kris Jacobs, Hugues Langloi
Published by: 16th Annual Global Investment Conference
Date: 16 Mar 2010

“Since understanding and quantifying the evolution of security co-movements is critical for asset pricing and portfolio allocation, we investigate patterns and trends in correlations over time using weekly returns for large systems of developed markets (DMs) and emerging markets (EMs) during the period 1973-2009. We use the DECO, DCC, and BEKK correlation models, and develop a novel dynamic t-copula which generalizes the normal copula, to allow for dynamic tail dependence. We demonstrate that it is possible to overcome the well known dimensionality problems and compute correlation and tail dependence in international markets using large samples, without relying on factor models. Our results suggest that correlations have been significantly trending upward for both the DMs and EMs. Further, the evidence clearly contradicts the decoupling hypothesis. Although the tail dependence is increasing through time for both EMs and DMs, the level of the tail dependence is still very low at the end of our sample period for EMs as compared to DMs. Therefore, while the correlation analysis suggests that the diversification potential of EMs has largely disappeared, this is contradicted by our findings on tail dependence. Thus, even though diversification benefits might have lessened in the case of DMs, the case for EMs remains intact.”

Full article (PDF): Link

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Time-Varying Sharpe Ratios and Market Timing

11 Sep

Article by: Robert F. Whitelaw
Published by: NYU, Stern School of Business
Date: 19 Nov 1997

“This paper documents predictable time-variation in stock market Sharpe ratios. Predetermined
nancial variables are used to estimate both the conditional mean and volatility of equity returns,
and these moments are combined to estimate the conditional Sharpe ratio. In sample, estimated
conditional Sharpe ratios show substantial time-variation that coincides with the variation in ex
post Sharpe ratios and with the phases of the business cycle. Generally, Sharpe ratios are low
at the peak of the cycle and high at the trough. In out-of-sample analysis, using 10-year rolling
regressions, we can identify periods in which the ex post Sharpe ratio is approximately three times
larger than its full-sample value. Moreover, relatively naive market-timing strategies that exploit
this predictability can generate Sharpe ratios more than 70% larger than a buy-and-hold strategy.”

Full article (PDF): Link

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Betting on volatility: Can you make money from fear?

22 Aug

Article by: John Waggoner
Published by: USA Today
Date: Aug 2011

“When the stock market dives 300 points, pundits start talking about increased volatility. By that reasoning, a broken arm could be referred to as increased flexibility.

“Thanks to the ever-inventive exchange-traded fund industry, volatility is not just a concept: It’s an investment opportunity. Why you would want to invest in volatility is another question — particularly, since not all the current offerings track volatility that well.

“Wall Street’s main measure of volatility is the CBOE Volatility Index, known as the VIX. Some people also call it the Fear Index, because most people associate big sharp market moves with scary down moves.

“Properly speaking, however, volatility refers to both up and down movements.”

Full article: Link

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Posted in Implied volatility, Investing ideas

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