USING IMPLIED VOLATILITY TO PREDICT ETF RETURNS (1/30/16)
/To see the origin of this series click here
In the paper that inspired this series ("What Does Individual Option Volatility Smirk Tell Us About Future Equity Returns?") the authors' research shows that their calculation of the Option Volatility Smirk is predictive of equity returns up to 4 weeks. Therefore, each week, I will calculate the Long/Short legs of a portfolio constructed by following their criteria as closely as possible. However this study will focus on ETF's as opposed to single name equities. I will then track the results of the Long/Short portfolio, in equity returns, cumulatively for 4 weeks before rotating out of that portfolio. The ETF's are selected from the following groups:
PORTFOLIO ONE
Longs: XLF, EPI, VOX, XLI, XLP, XLV, HEDJ, IYT
Shorts: EZU, XLB, GDXJ, XRT, XHB, VGK, KRE, EWT
Week 1, Week 2, Week 3, Week 4 and Cumulative Results:
PORTFOLIO TWO
Longs: VPU, IJR, FEZ, IWB, INDA, HEDJ, IYT
Shorts: LQD, EWW, IAU, VDE, EWT, EEM, EWH
Week 1, Week 2, Week 3 and Cumulative Results:
PORTFOLIO THREE
Longs: VWO, KRE, XLU, EEM, HEDJ
Shorts: EWW, HACK, JNK, XLP, IYR
Week 1, Week 2 and Cumulative Results:
PORTFOLIO FOUR
Longs: XRT, XLY, XLP, XHB, GDXJ, IYT, XME, MDY
Shorts: EPI, XLU, HEDJ, JNK, EWQ, VEU, XLI
Week 1 Results:
PORTFOLIO FIVE
Longs: VO, GDX, XHB, XLB, HACK, XLY, XLP, XLU
Shorts: ACWI, VWO, IYJ, VB, VPU, ECH, VGK, IWB
ETF SKEW LONGS
VO
GDX
XHB
XLB
HACK
XLY
XLP
XLU
ETF SKEW SHORTS
ACWI
VWO
IYJ
VB
VPU
ECH
VGK
IWB
