Devoted to understanding market mechanics,the market's relentless search for truth and self appraisal with continuous feed back from participants. Appreciating the Camouflage, Deception,Delay, Feedback , Aggression,Decay,Frustation,Tension, and its release, Euphoria,Nurture from the markets
Thursday, October 1, 2009
SohamDas on Volatility and Mean Reversion
I take pleasure to post SohamDas's thoughts on Volatility
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.
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}
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