Revision for “Intraday volatility arbitrage strategy (VolArb)” created on April 23, 2015 @ 18:04:50
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Intraday volatility arbitrage strategy (VolArb)

It has been long observed (Lo and MacKinlay 1988) that, for a meanreverting process, the high frequency volatility is bigger than the low frequency volatility, hence an arbitrage opportunity. For instance, the daily volatility > monthly volatility > yearly volatility. Conceivably, we may make a profit by buying the bigger volatility and selling the smaller volatility. In fact, we can mathematically compute the expected P&L for any price process.
The success of the VolArb strategy depends on We have extensively evaluated the performance of VolArb on trading currency pairs in many settings, taking into account bidask. For low frequency trading, the P&L is above 6% of the <em>maximal</em> exposure with a max draw down of 2 – 3%. The Sharpe ratio ranges from 2 to 3. For higher frequency trading, e.g., intraday, the P&L ranges from 20% – 40% of the <em>maximal</em> exposure with a max draw down of 2 – 8%. The Sharpe ratio is above 2. 
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