I have tried to look at monthly volatility of NIFTY Index.
- The inspiration for this post here.
- Average Monthly range is taken as proxy for volatility ( Ln(H/L))
- Data from 2003 to Apr 2009 is available - 76 data points
- Most Volatile month is October at 18.94%.
- Least Volatile month Feb at 8.83 %
- October has highest correlation of volatility with previous month at 0.98. Even though volatility clusters this is pretty high
1. Given that Volatility is low till now can we expect increase in volatility or this time it is different?
2. India VIX low
3. Will the low IV s signalling a blowout run in Indian markets ?
4. If the hypothesis of October expected to be volatile can we set up a options strategy being Long straddles
7 comments:
Historically, VIX is strongly mean reverting, hence we should be able to fit a standard mean reversion model (usually I gravitate towards Ornstein Uhlenbeck, but I couldnt fit properly) to some extent.
So, if we are indeed able to form a consensus on the "low"-ness of the present VIX, we should be seeing a run up very soon, how soon I dont know.So yes, it would be better to go long in ATM straddles.
My 2cents.
Soham
Insightful observations. I really admire the Falcon trading system and its results posted in your blog.
Hi Soham,
If low VIX is obvious or consensus view can it be tradable ? The dilemma of obvious is dubious in Chess and markets ( Nigel Davis of DailySpec) and the concept of everchanging cycles making me hesitate on this trade.
Is the low volatility masing any abnormal movement or Blowout phase in Indian markets?
How to detect a regime shift ex-ante in Indian Markets ( Recourse to Econometric methods ?)
Hi GD,
I just try to have some transparency in what I am doing. There is no point, if I dont practice what I preach. If I flay the MF managers, then surely I have to outdo them, isnt it? {Falcon Pride is the name of the fund which I am managing. I intend to add some flavours into it, hence calling it FP system wont be entirely right :) }
About VIX, consensus
The point is exactly that! Is it obvious to market participants that VIX is low? And low doesn't give any information. I would rather say, are they discerning, if its historically "out of whack". I might be wrong, but I dont think many people will think that way. So I would say, it is a fantastic opportunity to apply a trading strategy which is totally different from the usual market strategies, i.e less $$$ are chasing it.
Everchanging Cycles?
Umm...The cycle behaviour is not that pronounced, cycles are mean reverting but all mean reverting signals are not cyclic. So, as it becomes non intuitive, you know...
How to detect a regime shift?
Well, VIX shooting up wont really be a full scale regime shift, because it again reverts back. But if we want to detect/predict a rise in VIX,MA-GARCH modelling might help {I did some work in it, but didnt really exploit it commercially yet}.
Soham
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