James Picerno Blog | Research Review - Volatility | Talkmarkets
Editor at The ETF Asset Class Performance Review
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James Picerno is a veteran financial journalist and has been writing about portfolio strategies, investment products, and macroeconomics since the early 1990s at Bloomberg, Dow Jones and other media groups before becoming an independent writer/analyst/consultant in 2008. He’s currently ... more

Research Review - Volatility

Date: Sunday, January 19, 2020 8:20 AM EDT

Macro News and Long-Run Volatility Expectations
Anders Vilhelmsson (Lund University)
December 10, 2019
I propose a new model-free method for estimating long-run changes in expected volatility using VIX futures contracts. The method is applied to measure the effect on stock market volatility of scheduled macroeconomic news announcements. I find that looking at long-run changes gives qualitatively different results compared to previous studies that only look at realized variance and the VIX. I further find that FOMC announcements on average resolve uncertainty, but only during times when policy uncertainty is higher than average. Real side macro announcements increase long-run volatility during times of low policy uncertainty, but the effect is reversed during times of high policy uncertainty.

Portfolio Strategies for Volatility Investing
Jim Campasano (Kansas State University)
November 20, 2019
The VIX premium has been shown to hold predictive power over volatility returns and investment risk. Applied within a portfolio construct, this study proposes a conditional strategy which allocates to market and volatility risk. While the strategy is predominantly short volatility, the strategy owns volatility during much of the financial crises. Both long and short volatility allocations prove profitable over the sample period, producing a portfolio more consistently profitable than the S\&P 500 Index and related strategies.

Risk On-Risk Off: A Regime Switching Model for Active Portfolio Management
José Pablo Dapena (University of CEMA), et al.
December 1, 2019
Unlike passive management, where investors almost do not buy and sell securities, active management involves a set of trading rules that govern investment decisions regarding mainly market timing. In this paper, we take the basics of active management and the two fund separation approach, to exploit the fact that an investor can switch between the market portfolio and the risk free asset according to the perceived state of the nature. Our purpose is to evaluate if there is an active management premium by testing performance with our own non-conventional multifactor model, constructed with a Hidden Markov Model which depending on the market states signaled by the level of volatility spread. We have documented that effectively, there is present a premium for actively manage the strategies, giving evidence against the idea that “active managers” destroy capital. We then propose the volatility spread as the active management factor into the Carhart’s model used to evaluate trading strategies with respect to a benchmark portfolio.

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