The volatility risk premium (VRP) refers to the compensation investors receive for bearing the risk of higher-than-expected market volatility, often manifesting as the difference between implied and realized volatility in options markets. The VRP is not constant; it changes according to the market regime. Reference proposed a timing scheme …

The Hurst exponent is a statistical measure used to evaluate the long-term memory or autocorrelation of a time series, indicating whether a system exhibits trending behavior, mean-reverting characteristics, or randomness. A Hurst exponent greater than 0.5 signifies the existence of long-range dependence, implying that previous trends are prone to persisting …

A covered call is an options strategy where an investor holds a long position in a stock and simultaneously sells a call option on the same stock. This strategy allows the investor to generate additional income from the premium received by selling the call option. The trade-off is that if …

Pairs trading is a market-neutral strategy that involves taking long and short positions in two correlated assets to profit from their relative price movements. However, the profitability of pairs trading has been diminishing due to, in part, its growing popularity. Reference examined the profitability of pairs trading in the …

Time series momentum is a trading strategy that involves buying assets that have exhibited upward price trends and selling those that have shown downward trends over a specific time period. The premise is that assets with positive momentum will continue to perform well in the short term, while those with …

Pairs trading is a market-neutral strategy that involves simultaneously buying and selling two correlated assets to exploit their price discrepancies. The strategy aims to profit from the relative movements between the two assets, regardless of the overall market direction. Pairs trading requires careful selection of pairs and constant monitoring to …

Machine learning is a subset of artificial intelligence that involves training algorithms to learn patterns from data and make predictions or decisions without being explicitly programmed. It encompasses a range of techniques, from simple linear regression to complex neural networks, and is used in various applications such as image and …

The momentum anomaly in the stock market refers to the phenomenon where stocks that have performed well in the past continue to perform well in the near future, and those that have performed poorly continue to underperform. Momentum strategies exploit this anomaly by buying stocks with high past returns and …

Statistical arbitrage is a classic trading strategy, invented in the 1980s. We mostly see it being applied in the equity markets, but statistical arbitrage is not limited to equities. It can be applied to other asset classes as well. Reference examined the statistical arbitrage strategy in the commodity markets, …

A mean reversion trading strategy is based on the concept that asset prices will revert to their historical average or mean over time. This strategy identifies securities that have deviated significantly from their historical averages, with the expectation that they will eventually return to those levels. The goal is to …