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I was recently sent an undergrad research paper titled "Trading strategies based on Vix Term Structure" that explored ways to capture the volatility risk premium (VRP), The paper presented three main strategies: Long Short VIX (LSV), Hedge Long Short VIX (HLSV) and Long Spy Long VIX (LSLV). LSV tries to collect the volatility risk premium by going long or short volatility ETF’s that proxy the futures curve and roll part of the exposure daily. The HLSV strategy expands on the LSV strategy but also adds long or short S&P 500 exposure as a hedge. LSLV explores how a VRP strategy can enhance a long only portfolio of S&P 500 stocks.
I have shared the backtests below.
Would love any comments on how to make VRP better or any code improvements.
LSV:
LSLV:
Derek Melchin
Hi Daniel,
Consider reviewing Quantpedia's VRP implementation to look for ways to improve the algorithms above. Their implementation achieved a Sharpe ratio of 0.63, which is larger than the Sharpe ratio of all the algorithms above if we backtest them over the same time period.
Best,
Derek Melchin
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