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Investigating the Volatility Term Structure and Integration with Historical and Implied Vol

January 7, 2010

wow, that was a long title! well this is on the to do list shortly. the linkage between the past vol, implied vol, and forward implied vol will surely bear some interesting fruit. Long-time readers will remember the power of implied versus historical volatility for predicting the magnitude of returns for the S&P500. It is also a key filter for determining whether mean-reversion or trending behavior will dominate performance. Here is a way back flashback to a classic article :

https://cssanalytics.wordpress.com/2009/08/25/moderators-of-daily-follow-through-mr-implied-volatility-vs-historical-volatility/

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One Comment leave one →
  1. Brad permalink
    January 7, 2010 6:26 am

    David, could you clarify a point from the referenced article? Baseline Daily FT MR implies which strategy? Follow Through OR Mean Reversion? I presume you are referring to mean reversion i.e. if the market is up today then you are shorting it tomorrow and vice versa. The inclusion of FT is a tad confusing.

    If my presumption is correct, then the bottom line is you are saying that following a strategy such as your DVO oscillator would have better risk adjusted returns if you only took the signals from this oscillator when IV-HV was above average?

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