Trading VIX Futures Under Mean Reversion with Regime Switching

Li, Jiao

doi:10.2139/ssrn.2784215

“…The term structure can be either increasing concave or decreasing convex (see e.g. Li (2016) and Chap 5 of Leung and Li (2016 . The term structure has changed from decreasing convex to increasing concave.…”

Section: Cir Modelmentioning

confidence: 99%

“…The term structure can be either increasing concave or decreasing convex (see e.g. Li (2016) and Chap 5 of Leung and Li (2016).) While the good fits further suggest that the CIR Model is a suitable model for VIX, we remark that there exist examples of irregularly shaped VIX term structures and calibrated model parameters often change over time.…”

Section: Cir Modelmentioning

confidence: 99%

Dynamic Index Tracking and Risk Exposure Control Using Derivatives

Leung

¹

,

Ward

²

2018

Applied Mathematical Finance

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We develop a methodology for index tracking and risk exposure control using financial derivatives. Under a continuous-time diffusion framework for price evolution, we present a pathwise approach to construct dynamic portfolios of derivatives in order to gain exposure to an index and/or market factors that may be not directly tradable. Among our results, we establish a general tracking condition that relates the portfolio drift to the desired exposure coefficients under any given model. We also derive a slippage process that reveals how the portfolio return deviates from the targeted return. In our multifactor setting, the portfolio's realized slippage depends not only on the realized variance of the index, but also the realized covariance among the index and factors. We implement our trading strategies under a number of models, and compare the tracking strategies and performances when using different derivatives, such as futures and options.

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“…The term structure can be either increasing concave or decreasing convex (see e.g. Li (2016) and Chap 5 of Leung and Li (2016) The futures trading strategy is given by…”

Section: Cir Modelmentioning

confidence: 99%

Dynamic Index Tracking and Risk Exposure Control Using Derivatives

Leung

¹

,

Ward

²

2017

View full text Add to dashboard Cite

We develop a methodology for index tracking and risk exposure control using financial derivatives. Under a continuous-time diffusion framework for price evolution, we present a pathwise approach to construct dynamic portfolios of derivatives in order to gain exposure to an index and/or market factors that may be not directly tradable. Among our results, we establish a general tracking condition that relates the portfolio drift to the desired exposure coefficients under any given model. We also derive a slippage process that reveals how the portfolio return deviates from the targeted return. In our multifactor setting, the portfolio's realized slippage depends not only on the realized variance of the index, but also the realized covariance among the index and factors. We implement our trading strategies under a number of models, and compare the tracking strategies and performances when using different derivatives, such as futures and options.

show abstract

“…Song et al (2009) present a numerical stochastic approximation scheme to determine the optimal buy-low-sellhigh strategy over a finite horizon. On trading futures on a mean-reverting spot, and Li (2016) discuss an approach that involves numerically solving a series of variational inequalities using finite-difference methods. Recognizing the converging spread between futures and spot, Dai et al (2011) propose a Brownian bridge model to find the optimal timing to capture the spread.…”

Section: Introductionmentioning

confidence: 99%

Mean Reversion Trading with Sequential Deadlines and Transaction Costs

Kitapbayev

¹

,

Leung

²

2018

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We study the optimal timing strategies for trading a mean-reverting price process with a finite deadline to enter and a separate finite deadline to exit the market. The price process is modeled by a diffusion with an affine drift that encapsulates a number of well-known models, including the Ornstein-Uhlenbeck (OU) model, Cox-Ingersoll-Ross (CIR) model, Jacobi model, and inhomogeneous geometric Brownian motion (IGBM) model. We analyze three types of trading strategies: (i) the long-short (long to open, short to close) strategy; (ii) the short-long (short to open, long to close) strategy, and (iii) the chooser strategy whereby the trader has the added flexibility to enter the market by taking either a long or short position, and subsequently close the position. For each strategy, we solve an optimal double stopping problem with sequential deadlines, and determine the optimal timing of trades. Our solution methodology utilizes the local time-space calculus of Peskir (2005) to derive nonlinear integral equations of Volterra-type that uniquely characterize the trading boundaries. Numerical implementation of the integral equations provides examples of the optimal trading boundaries. JEL Classification: C41, G11, G12 MSC2010: Primary 91G20, 60G40. Secondary 60J60, 35R35, 45G10.

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Trading VIX Futures Under Mean Reversion with Regime Switching

Cited by 3 publications

References 39 publications

Dynamic Index Tracking and Risk Exposure Control Using Derivatives

Dynamic Index Tracking and Risk Exposure Control Using Derivatives

Dynamic Index Tracking and Risk Exposure Control Using Derivatives

Mean Reversion Trading with Sequential Deadlines and Transaction Costs

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