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

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  • #1925
    moliu9394
    Member

    http://www.numericalmethod.com/wiki/numericalmethod/wiki/ModelVolArb#

    May I konw what do you mean by “buying the bigger volatility and selling the smaller volatility”?

    My interpretation is to buy an option and delta hedge it so that it’s market neutral ( total delta is 0).

    However in the “ModelVolArb Summary ” , it states that “This strategy trades on a synthetic mean-reverting pair (hedge ratio ¦Â) by selecting an appropriate frequence difference (H). For example, a synthetic pair made of AUDNZD and GBPJPY.”

    There is no option on the spread of  “AUDNZD -GBPJPY” .

    So what actually do you trade on ?

    #2189
    sid777
    Member

    Eg,

    Hourly vol > daily vol: buy/sell when price less/more than mean

    Is that the same as replicating vol?

    #2190
    Ryu
    Member

    It depends on how you compute ‘vol’.

    #2191
    sid777
    Member

    Vh = sum (xt-xtm1-mean)/(n-1)
    Vd = sum (xt-xtm24-24*mean)/(n-1)

    Where x are hourly close.
    xtm1 is xt lag 1
    xtm24 is xt lag 24

    Is this correct?

    #2192
    Ryu
    Member

    I mean, there are many ways to compute ‘vol’, public or proprietary.

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