Strategies · Library · Volatility
§7.3.1Pairs and relative value
Hedging short VXX with VIX futures
A variant of §7.3 Volatility carry with two ETNs
Same short on the front-heavy note, but the hedge is a basket of medium-dated VIX futures instead of the other note, with weights chosen to follow the note closely.
- Asset class
- Volatility
- Held for
- Months
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Weights from a regression of the note onto the futures returns, using their covariance.
- Entry and exit
- Rebalance monthly or more often; weights can be bounded to stay non-negative or sum to one.
- Sizing
- Regression-based, optionally constrained.
How it fails
- Negative weights may appear
- Regression drifts
- Spikes still hurt
Data it needs
- VXX daily closes
- several VIX futures by maturity
Only front-month style series exist; no futures by maturity.
How ARCANE uses it
Not usable beyond a note in a research write-up.
Needs maturity-by-maturity futures and shorting.
Filed under the pairs and statistical arbitrage card
Find two securities whose prices moved together for a year. When the gap between them opens past two standard deviations, buy the laggard and sell the leader.
A paper plan from this card holds 5 to 126 days, stops at 1.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §7.3.1, p. 83 of the SSRN version. Described in our words. Pairs and relative value is ARCANE’s filing, not the book’s.