**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**:

Data collection |
Contacted several data providers and effectively |

Alphas detection |
The amount of data justifying an efficient environment, MatLab was selected to develop the analysis and simulation infrastructure. This allowed the |

Analysis & Modelization |
The relation between the different assets
is well described with a -
The at-the-money implied volatility of a single stock can be well described by a mix of the company's CDS, stock price, and a several other tradable instruments. -
This relationship is stable both through cross-sectional analysis (sub-groups of companies), as well as across time. The description parameters are stable, proving the effective existence of a mathematical relationship behind the data. -
The R ^{2}of the descriptive model is bound within a range of 60-80%, low enough to generate arbitrage opportunities, but high enough to avoid large marked-to-market fluctuations. -
The residues, of 3 to 20 vol points in size and fully tradable, are mean reverting at a rate of 20% per week. Since the trading costs are minimal, **the arbitrage strategy is viable**.
This relationship can be used
not only as
an |

Trading Simulation |
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 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. |