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Archive for May, 2012

Good Volatility, Bad Volatility: Signed Jumps and the Persistence of Volatility

25 May

Article by: Andrew J. Patton, Kevin Sheppard
Published by: Duke University
Date: 7 Oct 2011

“Using recently proposed estimators of the variation of positive and negative returns (“realized semivariances”), and high frequency data for the S&P 500 index and 105 individual stocks, this paper sheds new light on the predictability of equity price volatility. We show that future volatility is much more strongly related to the volatility of past negative returns than to that of positive returns, and this effect is stronger than that implied by standard asymmetric GARCH models. We also find that the impact of a jump on future volatility critically depends on the sign of the jump, with negative (positive) jumps in prices leading to significantly higher (lower) future volatility. A simple model exploiting these findings leads to significantly better out-of-sample forecast performance, across forecast horizons ranging from 1 day to 3 months”

Full article (PDF): Link

 
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Posted in Realized volatility

 

Buying VIX Calls As A Portfolio Hedge

25 May

Article by: Jim Fink
Published by: Seeking Alpha
Date: 23 May 2012

“Because VIX calls are based on VIX futures instead of the more volatile “spot” VIX, in the past I suggested that it would be easier to hedge a portfolio against a “black swan” stock market decline using S&P 500 puts-either the cash-settled SPX index puts or the equity-settled SPY ETF puts.

“Well, I stand corrected. In preparing for a conference down in beautiful Palm Beach, Florida, I read two academic studies-one published in 2009 and another published in 2012-that found VIX calls to be a much more effective portfolio hedge than S&P 500 puts. The reason is that most institutional investors (including mutual funds, hedge funds and pension funds) are benchmarked against the S&P 500 and have historically hedged their portfolios almost exclusively by purchasing S&P 500 puts. This institutional buying pressure has bid up their prices dramatically and made S&P 500 puts very expensive hedges for the rest of us. The more expensive a hedge, the less effective it is. By contrast, VIX calls have only been around since February 2006 and have yet to be widely adopted by “big money” institutions. Consequently, the prices of VIX calls have not been bid up by institutions and remain reasonable.”

Full article: Link

 
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Posted in Implied volatility

 

An Empirical Investigation of Continuous-Time Equity Return Models

15 May

Article by: Torben G. Andersen, Luca Benzoni, Jesper Lund
Published by: National Bureau of Economic Research
Date: Oct 2011

“This paper extends the class of stochastic volatility diffusions for asset returns to encompass Poisson jumps of time-varying intensity. We find that any reasonably descriptive continuous-time model for equity-index returns must allow for discrete jumps as well as stochastic volatility with a pronounced negative relationship between return and volatility innovations. We also find that the dominant empirical characteristics of the return process appear to be priced by the option market. Our analysis indicates a general correspondence between the evidence extracted from daily equity-index returns and the stylized features of the corresponding options market prices.”

Full article (PDF): Link

 
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Posted in Realized volatility