The VKOSPI Spread as a forward-looking Short-Term Dynamic Asset Allocation Indicator
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For the KOSPI200 Index (“Index”), a well-known negative and statistically significant relationship exists between the returns of the Index and VKOSPI, the official model-free implied volatility index. Our primary research purpose is to test VKOSPI as an informative and meaningful trading indicator and to develop a set of algorithmic trading strategies to time the market. To further exploit VKOSPI as a trading indicator in relation to forward looking index returns, it is decomposed into a model-based conditionally forecasted volatility and a residual part. The discrepancy between the realized VKOSPI and the model-forecast is subsequently called VKOSPI Spread (the “Spread”). Both long and short positions triggered by large Spread and the trading strategies are evaluated in terms of their ability to outperform the index benchmark in falling, rising and steady risk aversion regimes. There is some empirical evidence for expecting opportunities for positive future excess and risk-adjusted returns for long and short positions triggered by large movements in the Spread. This finding is more prominent during the periods of both rising and steady risk aversions. Trading strategy is tested on the data period from Jan 2, 2003 to May 29, 2015. The time-varying return-volatility relation is used to implement a set of dynamic asset allocation strategies by analyzing Spread with its corresponding Index. With asymmetric volatility phenomenon in the Korean stock market, some of the selected benchmark-outperforming dynamic asset allocation strategies are effectively developed by processing meaningful signals from Spread on the Index Futures.
Abstract
For the KOSPI200 Index (“Index”), a well-known negative and statistically significant relationship exists between the returns of the Index and VKOSPI, the official model-free implied volatility index. Our primary research purpose is to test VKOSPI as an informative and meaningful trading indicator and to develop a set of algorithmic trading strategies to time the market. To further exploit VKOSPI as a trading indicator in relation to forward looking index returns, it is decomposed into a model-based conditionally forecasted volatility and a residual part. The discrepancy between the realized VKOSPI and the model-forecast is subsequently called VKOSPI Spread (the “Spread”). Both long and short positions triggered by large Spread and the trading strategies are evaluated in terms of their ability to outperform the index benchmark in falling, rising and steady risk aversion regimes. There is some empirical evidence for expecting opportunities for positive future excess and risk-adjusted returns for long and short positions triggered by large movements in the Spread. This finding is more prominent during the periods of both rising and steady risk aversions. Trading strategy is tested on the data period from Jan 2, 2003 to May 29, 2015. The time-varying return-volatility relation is used to implement a set of dynamic asset allocation strategies by analyzing Spread with its corresponding Index. With asymmetric volatility phenomenon in the Korean stock market, some of the selected benchmark-outperforming dynamic asset allocation strategies are effectively developed by processing meaningful signals from Spread on the Index Futures.
참고문헌 (26)
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