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yoneda


Total Posts: 6
Joined: Jun 2019
 
Posted: 2019-09-08 16:14
I am still relatively new to this phorum so please pardon my ignorance. My impression so far is that people seems to prefer volatility to momentum strategies, and many discussion on momentum is generally faced with skepticisms. I dont understand why.

1. Momentum (cross sectional or time series) has been "proven" to exist in a variety of markets in many research papers, and as well as "traders' anecdotal evidences".

2. Volatility likewise has also been documented to have persisting features such as clustering and mean reversion (see Sinclair's book) and one can learn to trade such opportunities.

Now what I can imagine is that this is a matter of preference in terms of returns (and return's characteristics): maybe return of momentum is not great enough (short term) for you guys to implement. Or maybe the tax implication of carrying out such strategies.

Could you guys elucidate your thoughts on this? I would also appreciate if you could help correct, or expand some of my arguments/thoughts above.

Some of my random questions:

Can one compare momentum versus volatility strategies in terms of risk? Both requires betting about the future value of prices and of volatilites (which according to Sinclair is "slower-moving" than prices and maybe less risk???).

If you have to classify all trading and investment strategies into broad categories, how would you do it? Which features would you based your categories on?

Thank you all.

Zoho


Total Posts: 28
Joined: Feb 2018
 
Posted: 2019-09-09 16:03
it could be that people preferring volatility to momentum are not professional with momentum (cross-sectional). and people that are professional with momentum prefer not to comment that type of the signals at least here. From the observed comments people like anonq or may be eric16 could know something and they prefer silence...

yoneda


Total Posts: 6
Joined: Jun 2019
 
Posted: 2019-09-09 16:49
Thanks Zoho, at least I got some names to search their posts. But looking at the lack of response I guess my question is too basic, or off topic.

bullero


Total Posts: 52
Joined: Feb 2018
 
Posted: 2019-09-09 19:58
First, you need to define more precisely what you refer to when you speak about volatility trading. Do you mean implied vs realized or something else? Then, you need to understand that these strategies are usually collected together into a portfolio of different strategies. Why? Well, because sometimes momentum works and sometimes something else works. So it is kind of meaningless to speak about which one is "preferred", mom or vol. Its like you are asking which one is better: bread or butter?

yoneda


Total Posts: 6
Joined: Jun 2019
 
Posted: 2019-09-18 10:32
Yes, I mean inplied versus realized volatility strategy. I could not be more specific as I am reading the books of Sinclair and Joshi.

Would it be too naive to say that any directional strategy such as momentum where one directly forecast the direction of the underlying and then trade this signal is more risky than volatility trading because the latter does not care about direction? Still one has to forecast the direction of volatility to be successful. In a nutshell volatility is one degree of freedom less than directional strategy.

bullero


Total Posts: 52
Joined: Feb 2018
 
Posted: 2019-09-18 10:51
You can also blow up when trading volatility. Think about var swap which is convex in realized vol.

chiral3
Founding Member

Total Posts: 5098
Joined: Mar 2004
 
Posted: 2019-09-18 11:25
Typically when people refer to "volatility" and "momentum" together they are referring to factors. So a typical vol strategy would be l/s a basket of 10th%ile beta against 90th%tile beta. While both "buy the dip" and "short vol" have been around forever, they've taken on slightly different interpretations in recent past. For instance, in the US, SPX vol hasn't been realizing, so short vol has been a very popular strat. I would differentiate risk premia and factor in these cases. It's just nomenclature.

Nonius is Satoshi Nakamoto. 物の哀れ

bullero


Total Posts: 52
Joined: Feb 2018
 
Posted: 2019-09-18 13:30
@chiral3: Yes you are absolutely correct, it should be indeed specified whether we are talking about "factor" or "implied vs realized" vol premium Smiley.

As a side note. You can actually mathematically "prove" that - under certain assumptions - time series momentum strategies tend to replicate the properties of certain variance strategies even if implemented using delta ones.

Shameless plug: https://tldao.github.io/pdfs/convexity_covariance_arbitrage.pdf
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