USING IMPLIED VOLATILITY TO PREDICT ETF RETURNS (2/27/16)
/FOR A DEEPER DIVE INTO ETF PERFORMANCE AND RELATIVE VALUE SUBSCRIBE TO THE ETF INTERNAL ANALYTICS PACKAGE HERE
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 FIVE
Longs: VO, GDX, XHB, XLB, HACK, XLY, XLP, XLU
Shorts: ACWI, VWO, IYJ, VB, VPU, ECH, VGK, IWB
PORTFOLIO SIX:
LONGS: IJR, ACWI, IJH, KBE, VWO, XLY, XLU, IYG
SHORTS: EWU, XHB, VXUS, VPU, IXC, EWW, VGK, EPI
PORTFOLIO SEVEN:
LONGS: RTH, FDN, IDU, EPI, HACK, XLU, IYG, HEDJ
SHORTS: EWA, MOO, VOX, VGK, EWH, EWW, IAU, IJR
PORTFOLIO EIGHT:
LONGS: IYG, XLP, EWW, EPI, MDY, XLU, IYR, IAU
SHORTS: HEDJ, INDA, IWB, VXUS, EWS, EZU, EWU, LQD
CUMULATIVE GROSS PRICE RETURN (ALL PORTFOLIOS)
PORTFOLIO NINE:
LONGS: HACK, EWW, XLV, XLY, XLB, ECH, IVV, IYE, XLP
SHORTS: KRE, VO, XHB, VXUS, HEDJ, XRT, FEZ, BND
