USING IMPLIED VOLATILITY TO PREDICT ETF RETURNS (1/17/16)

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, and Cumulative Results: 

PORTFOLIO TWO

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

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

Week 1 Results:

PORTFOLIO THREE

Longs: VWO, KRE, XLU, EEM, HEDJ

Shorts: EWW, HACK, JNK, XLP, IYR

ETF SKEW LONGS

VWO

KRE

XLU

EEM

HEDJ

ETF SKEW SHORTS

EWW

HACK

JNK

XLP

IYR