Fear Trading

Ardia, David (2003): Fear Trading.

Abstract

Our trading strategy is inspired from the paper "implied volatility indices as leading indicators of stock index returns?", Giot (2002,[3]). It uses stylized facts observed in stock markets: the so called "leverage effect", the clustering and the mean-reverting behaviour of the implied volatility. Based on S&P100 and VIX data, we show that abnormally high levels of volatility can be used as a trading signals for long traders. A bootstrap procedure confirms the significant returns for the 1986-2003 period.

• Item Type: MPRA Paper
• Language: English
• Keywords: VIX, trading strategy
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C29 - Other; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods; Simulation Methods

References

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Giot P. (2002). Implied volatility indices as leading indicators of stock index returns? CORE DP 2002/50.

Giot P. (2002). The information content of implied volatility indexes for forecasting volatility and market risk.

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Poon S., Granger C. (2003). Forecasting volatility in financial markets: a review. Forthcoming in the Journal of Economic Literature.

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Blair B. J., Poon S., Taylor S. J. (2001). Forecasting S&P100 volatility: the incremental information content of implied volatilities and high-frequency index returns. Journal of Econometrics 105.