Jan 16, 2012

VXEM Volume

It looks like VXEM Futures launch was a success after all - total volume for the first week was 1527 contracts, and current open interest stands at 380. Wednesday was a particularly active day, trading over 1000 contracts. Trading activity seems to be distributed across months with March contract being the most active. CBOE already indicated that VXEM options are on the way, and it would be very exciting to see another volatility product in addition to VIX.

Jan 15, 2012

Variance Risk Premium In VIX Options

Few months ago I wrote about excellent research from Reed Hogan on volatility risk premium in VIX options. He has polished up the paper for academic publication, and the new version is now available on SSRN.

Jan 13, 2012

VKOSPI Futures On The Way

More exciting news from the world of listed volatility futures: in a recent interview Kim Jingyu - Korea Exchange official stated that exchange plans to list volatility futures on VKOSPI - nation's volatility index based on Kospi 200 options "as soon as possible". Link to the Bloomberg article here; at the time of writing I could not find any information about proposed contract specs.

P.S. Here is a link to KRX document with proposed specifications for VKOSPI futures and VKOSPI options.

Jan 10, 2012

VXEM Modest Début

VXEM - futures on VXEEM index were listed on CBOE yesterday, and traded 5 contracts. This is a very weak beginning, which is even worse than GVZ that traded 8 contracts on its first day. At the time of writing CBOE has not updated their website on the volume for the new product. We still have high hopes for VNKY and VHSI futures.

Jan 7, 2012

Artemis Capital Management

Christopher Cole, of Artemis Capital Management publishes a quarterly newsletter discussing everything from macro effects on volatility to technical aspects of risk distributions. His newsletter is a must-read for any volatility professional. Here are the links to the past newsletters, and I will be adding new ones to Volatility Publications page.


Fighting Greek Fire with Fire: Volatility Correlation, and Truth, September 30, 2011
Is Volatility Broken? Normalcy Bias and Abnormal Variance, March 30, 2011
The Great Vega Short- volatility, tail risk, and sleeping elephants, January 4, 2011
Unified Risk Theory - Correlation, Vol, M3 and Pineapples, September 30, 2010

Jan 3, 2012

Error Analysis of Volatility Forecasts in 2011

For the sake of complete transparency I keep a log of all forecasts made on the blog - this way you can plainly see if my model is valid, or if it is full of sh!t. The end of the year is a good time to summarize forecasting performance. 2011 was not an easy year marker with completely unforeseeable earthquake in Japan, political events in Egypt and Libya, and Sovereign Debt Crisis, but the VIX model performed well.










Of the 12 forecasts my forecast error (calculated as absolute difference between my forecast and VRO - VIX settlement value) was smaller than the market's 8 times out of 12. The average error was 4.44 vs 4.80 in the futures. Simulated trading signals also performed well - there were 5 buys signals and 7 sell signals with simulated PL of 41.64 VIX points, or 3.47 VIX points per month. For simplicity transaction costs are not taken into account. There were 4 negative months and 8 positive ones. While most of the profit was made in 3 months with PL over 10 VIX points, the model is positive even after removing these 3 top months.