Jul 29, 2014

VKOSPI Futures Update

According to a recent article in Risk magazine Korea's Financial Services Commission is planning to introduce volatility futures on VKOSPI index sometime before the end of the year. It has been for quite sometime in the planning stage ( I first wrote about it 2.5 years ago ) but the product may finally come to the market. Given lack of liquidity in other Asian volatility futures I am pessimistic about the product attracting volume.

Jul 28, 2014

Reliability of the Maximum Drawdown

I recently came across an old article titled Reliability of the Maximum Drawdown, and suggest that trades familiarize themselves with the ideas mentioned there. I would like to suggest an idea that may be a way forward.

The mathematics of maximum drawdown (expected maximum drawdown, and its distribution) are far from trivial, and many other related measures (for example expected length of drawdown) afaik have not been seriously studied at all.

The problem with max-measures, like mentioned in the article above, is that they are extreme measures, and thus are at the very corner of distribution charts. If you have a strategy that suffered a maximum drawdown of x% you know that such drawdown is possible, but if you observe another strategy with smaller drawdown, you can hardly be sure that it will not suffer from a greater drawdown in the future.

One possible way forward is to use "average measures" - average drawdown and average drawdown length instead of their max counterparts. Intuition suggests (and my extensive monte carlo confirms) that these measures have smaller variability,  smaller skewness, and more predictive (as measured by linear and nonlinear correlations) from one period to the next. These measures seem to scale linearly with time, with the scale coeffcient depending on kurtosis. I don't have the maths to take this much further on my own, but if you have some ideas please leave a comment or send me an email.

Jun 27, 2014

Weekend Reading

Risk: Asia-specific Vix indexes fail to ignite market interest.
The title pretty much says it all, that outside US and VSTOXX on Eurex volatility futures have not taken off. Will this change now since CBOE introduced (almost) 24-hour trading in VIX futures? Will arbitrageurs add liquidity to Asian products, or will Asian hedgers flock to VIX to manage risk? Only time will tell.