One more practical research paper related to #20 - Volatility Risk Premium Effect Thursday, 18 June, 2015

#20 - Volatility Risk Premium Effect

Authors: Donninger

Title: Hedging Adaptive Put Writing with VIX Futures : The Affenpinscher Strategy

Link: http://www.godotfinance.com/pdf/AffenPinscherStrategy_Rev1.pdf

Abstract:

In a previous working paper I analyzed the Austrian and Doberman Pinscher strategy. The Austrian is an adaptive Put Writing strategy. One hedges the short position with a long Put with a lower strike. The Doberman is more aggressive. The long hedge is omitted. The risk is in both cases reduced by entry and exit conditions. The Affenpinscher uses the same general framework. But the hedging is done with long VIX Futures. There are several VIX Futures available. One selects the VIX Future with the lowest roll-value. The overall performance of the Affenpinscher is between the Austrian and Doberman Pinscher. The Pinscher strategies have generally an attractive performance. The best choice within the family is a matter of risk appetite. Revision 1 extends the historic simulation for the SPX Options till 2014-06-13.  As the original parameters are not changed we perform an out of sample test. The attractive properties of the strategy  are confirmed. Revision 1 is added before the Conclusion of the original paper. A similar update has been done for the other Pinscher strategies.

Notable quotations from the academic research paper:

...

"There is a vast strand of literature about the fact that the implied volatility of S&P-500 index options overestimate the realized volatility of the S&P-500. This relation is only reversed in serious crashes. The majority of this literature is part of the efficient markets debate. The authors try to find an explanation which is consistent with the efficient market dogma. This is from the point of view of a hedge fund quant a theological discussion. The really interesting question is how to exploit this fact."

Research paper then continues with a really practical analysis of multiple variants of hedged volatility short (put writing) trading strategy...


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