February 06, 2016

USING IMPLIED VOLATILITY TO PREDICT ETF RETURNS (2/06/16)

February 06, 2016/ Brian Christopher

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 TWO

Longs: VPU, IJR, FEZ, IWB, INDA, HEDJ, IYT

Shorts: LQD, EWW, IAU, VDE, EWT, EEM, EWH

PORTFOLIO THREE

Longs: VWO, KRE, XLU, EEM, HEDJ

Shorts: EWW, HACK, JNK, XLP, IYR

PORTFOLIO FOUR

Longs: XRT, XLY, XLP, XHB, GDXJ, IYT, XME, MDY

Shorts: EPI, XLU, HEDJ, JNK, EWQ, VEU, XLI

PORTFOLIO FIVE

Longs: VO, GDX, XHB, XLB, HACK, XLY, XLP, XLU

Shorts: ACWI, VWO, IYJ, VB, VPU, ECH, VGK, IWB

CUMULATIVE GROSS PRICE RETURN (ALL PORTFOLIOS)

PORTFOLIO 6:

LONGS: IJR, ACWI, IJH, KBE, VWO, XLY, XLU, IYG

SHORTS: EWU, XHB, VXUS, VPU, IXC, EWW, VGK, EPI

ETF SKEW LONGS

IJR

ACWI

IJH

KBE

VWO

XLY

XLU

IYG

ETF SKEW SHORTS

EWU

XHB

VXUS

VPU

IXC

EWW

VGK

EPI