Initiated the Structure Arbitrage activity at Tykhe
The comparison between the Credit and the Equity Volatility worlds easily shows strong behavior likeness. A structure arbitrage activity between the two classes of products followed, which, unlike the usual approach, isn't based on deep puts or fundamental analysis.
After having parsed without success the research literature, I started my own statistical analysis. The preliminary results were interesting enough to justify a full-scale study:
Contacted several data providers and effectively negotiated data acquisition, before going through a deep cleaning process.
The amount of data justifying an efficient environment, MatLab was selected to develop the analysis and simulation infrastructure.
This allowed the selection of the additional alphas, required for a proper description of the phenomenon.
|Analysis & Modelization||
The relation between the different assets is well described with a descriptive statistical approach, bringing the following results:
This relationship can be used not only as an indicator of future implied volatility, but also an effective skew model - describing precisely why some stocks deserve a larger skew than others and quantifying the appropriate level.
Whether as a volatility directional or a skew model, bets can be taken isolated (on a single stock approach), or by spreading them within sectors. In all cases, the strategy is largely scalable in size.
Although the strategy was proven valuable in its initial form, more work needs to be done to determine which of the trading approaches offers with the best Sharp ratio and other risk measures.