The volatility risk premium (VRP) represents the difference between the implied volatility of options and the realized volatility of the underlying asset. Essentially, it reflects the compensation that investors demand for bearing the risk associated with the uncertainty of future volatility. Typically, implied volatility is higher than realized volatility, indicating …

A significant challenge in designing trading strategies is the data mining problem, which arises from the vast amount of data available and the potential for spurious correlations. With an abundance of historical market data, traders may inadvertently identify patterns or relationships that appear significant but are merely coincidental. This can …

Volatility spillover refers to the transmission of volatility shocks from one market or asset to another, leading to increased volatility in the receiving market. These spillovers can occur within the same asset class or across different asset classes. For instance, a sudden increase in volatility in one stock market may …

A bull put spread is a type of options strategy used by investors who anticipate a moderate rise or at least stability in the price of the underlying asset. In this strategy, the investor sells a put option with a higher strike price while simultaneously buying a put option with …

Gold plays an important role as a diversifier in investment portfolios due to its unique characteristics. Historically, gold has exhibited a low correlation with other asset classes such as stocks and bonds, making it an effective hedge against market volatility and economic uncertainty. During times of economic downturns or geopolitical …

Volatility clustering is a phenomenon observed in financial markets where periods of high volatility tend to cluster together, followed by periods of low volatility. This pattern suggests that extreme price movements are not randomly distributed over time but rather occur in clusters or groups. Volatility clustering has undergone extensive study …

A correction in the equity market refers to a downward movement in stock prices after a sustained period of growth. Market corrections can be triggered by various factors such as economic indicators, changes in investor sentiment, or geopolitical events. During a correction, stock prices may decline by a certain percentage …

In a previous post, we discussed a theoretical model for studying the effectiveness of stop losses. In this post, we will present an empirical study of their efficacy in the commodity market. Reference examined how fixed and trailing stop losses perform in this market. The authors pointed out, This …

Covariance plays an important role in portfolio construction as it measures the relationship between the returns of different assets in a portfolio. Understanding covariance helps investors to diversify their investments effectively by selecting assets that are not highly correlated with each other. Covariance also allows investors to assess the impact …

A stop loss serves as a risk management tool, helping investors limit potential losses by automatically triggering the sale of a security when its price reaches a predetermined level. This level is set below the purchase price for long positions and above the purchase price for short positions. By implementing …