Actively Managed Volatility Strategies: Is it Possible to Disarm Ticking Time Bombs?

Atle Kristoffer Leif Alkelin & Olivia Bergkvist

Student thesis: Master thesis

Abstract

The popularity of short volatility strategies on the VIX has increased significantly over thepast decade. However, the recent increase in volatility of volatility has cannibalized returnsassociated with these strategies, culminating during the "Volmageddon" of February 5th2018 when the VIX saw its most significant daily increase ever recorded. The thesisbuilds upon the methodology of Cheng (2018) by applying ex-ante estimated volatilitypremiums as a signal in volatility futures strategies in the U.S. and Europe. The findingsconfirm that trading volatility actively based on premiums embedded in volatility futuressignificantly improves upon passive volatility strategies and deliver high risk-adjustedreturns, both on the U.S. and European markets. Actively trading volatility not onlyimproves upon performance but also reduces strategy drawdowns. Increasing tradingfrequency improves strategy performance more on the European than on the U.S. market,despite relatively large transaction costs.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2019
Number of pages68
SupervisorsFabrice Tourre