How to Beat the Market with the Implied Volatility Term Structure: The HeroRATs Strategy

8 Pages Posted: 19 Dec 2013

Date Written: December 12, 2013

Abstract

In the authors propose a simple paired-switching strategy. One selects a market-long ETF (SPY) and a negative correlated ETF (TLT). Depending on the 13-weeks momentum one holds either the SPY or the TLT.

This working-paper is a considerable refinement of this simple idea. Instead of the momentum the implied-volatility-term-structure (IVTS) is used as a selection criterion. There are no fixed periods, but the decision is taken on a daily basis. The IVTS was used successfully in a series of previous working papers. This working paper extends the IVTS by the recently introduced VIX-Short-Term Index VXST. The performance can further be significantly improved by filtering the IVTS with a median filter. The resulting strategy is very easy to implement and has minimal trading-costs. It beats the market (SPY) by a wide margin.

Keywords: Implied Volatility Term Structure, Market Regime Classification

Suggested Citation

Donninger, Chrilly, How to Beat the Market with the Implied Volatility Term Structure: The HeroRATs Strategy (December 12, 2013). Available at SSRN: https://ssrn.com/abstract=2369239 or http://dx.doi.org/10.2139/ssrn.2369239

Chrilly Donninger (Contact Author)

Nimzowerkstatt OEG ( email )

Altmelon 110
Arbesbach, Lower-Austria A-3925
Austria

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