Gaining the Alpha Advantage in Volatility Trading (Presentation Slides)
Quantitative Investment Strategies Summit, Amsterdam, 2015
37 Pages Posted: 7 Sep 2017
Date Written: May 18, 2015
We present some empirical evidence for short volatility strategies and for the cyclical pattern of their P&L. The cyclical pattern of the short volatility strategies produces an alpha in good times but collapses to the beta in bad times. We introduce a factor model with risk-aversion to explain the risk-premium of short volatility strategies as a compensation to bear losses in bad market regimes. We then consider an econometric model for statistical inference of market regimes and for optimal position sizing. Finally, we illustrate model applications for generating alpha from volatility strategies.
Keywords: Volatility trading, risk-premia, cyclicality risk, diversification
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation