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Re: Questions on Intra-day volatility arbitrage strategy (VolArb)?

Home 21090308 Forums Re: Questions on Intra-day volatility arbitrage strategy (VolArb)?

#2184
Ryu
Member

Given any price time series, the volatility changes depending on how often you take an observation. For instance, suppose, for AUDNZD, you use the hourly data to compute volatility (V_H) and the daily data to compute volatility (V_D). You will see that V_H is bigger than V_D statistically. This is a property of any mean-reverting asset/price process, which can be proved mathematically.

So, if you can replicate V_H by buying and selling AUDNZD, and replicate V_D by buying and selling AUDNZD. You  are expected to make a profit proportional to (V_H – V_D) > 0.

For a pair (AUDNZD, GBPJPY), the concept is the same. We apply it to the spread adjusted by beta, such as, Z = AUDNZD – GBPJPY. So, we are buying and sell AUDNZD and GBPJPY, according to the volatility difference signal.