Dr Silvia Stanescu, Lecturer in Finance at Kent Business School, was invited to speak at the 2014 ICBI Global Derivatives Conference, a prestigious quantitative finance practitioners’ conference, where she presented recent joint work with Professor Radu Tunaru on investment strategies with volatility derivatives.
In the first part of the presented study, the authors analyse the performance of various portfolios mixing equity with bonds but also considering volatility futures. The analysis was carried out comparatively for US using VIX futures and also for the Eurozone where VSTOXX futures were employed. The results point out that the best portfolio will contain a large proportion of equity, a smaller proportion of bonds and also of volatility index futures.
The key finding here is that bonds will help investors in periods of liquidity pressure while volatility futures will help to insulate the portfolio against temporary market crashes and systemic shock events. In the second part of the study, the authors identify a statistical arbitrage opportunity between the VIX and VSTOXX futures markets. The analysis is based on a unique data set, comprising the synchronous daily time-series of VIX and VSTOXX futures prices, which was compiled with help from Eurex. The in-sample results show that the VIX-VSTOXX (futures price) difference is significantly negative, in effect that there was more volatility in the Eurozone than in US. This relationship may change in the future but the statistical methodology presented in the paper along with the proposed trading strategies can be applied the same way.
The presented study is available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2351427.