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Quant Investing: Rule-Based Strategy using Realized Volatility

This report introduced two measures of realized volatility, RV30d and RV5min, and dives into their own characteristic.

Two Measures of Realized Volatility
DescriptionPastCurrentFuture Expectation
VIXa 30-day forward projection of volatilityOO
RV30dhistorical measures using daily returns over the prior 30 calendar daysOO
RV5minrealized measures using five-minute and intraday returnsO
A Brief Summary of VIX and Two Kinds of Realized Volatility

By using peak comparison and cross correlation in high volatile market, we found that for both RV30d and VIX, RV5min has its potential leading effect and could be utilized in the construction of rule-based trading strategy.

A sensitivity analysis is then introduced to calibrate this rule-based strategy with two parameters, and surprisingly we found that such strategy shows a good robustness over ten-year Walk Forward Optimization.

Slow Fast LineMean of RankingStd of RankingTotal Occurrences
Top 5 Pairs with Most Occurrences

Finally, according to “Calm” performance in backtesting results, the increase of Sharpe Ratio is about 70% compared to buy-and-hold SPY, and the decrease of Max drawdown is about 62%.

Start date2008/1/14
End date2021/2/24
Total months156
Annual return0.170475-0.0481520.114114
Cumulative returns6.778178-0.4743473.088626
Annual volatility0.1617420.1317470.208741
Sharpe ratio1.054236-0.3083270.622269
Calmar ratio0.869337-0.0854890.221661
Max drawdown-0.196098-0.563249-0.514815
Omega ratio1.2272410.8068681.135207
Sortino ratio1.543685-0.4105920.875957
Tail ratio0.938033NaN0.900183
Daily value at risk-0.019701-0.01676-0.025783
Performance Metrics for Rule-Based Strategy

[1] Edwards, T., & Preston, H. (2017). Reading vix R: Does vix predict future volatility. S&P Global Working Document.

[2] Jeffrey Lin (2021). Technical Report 202101. Gamma Paradigm Research.

[3] Bekaert, G., & Hoerova, M. (2014). The VIX, the variance premium and stock market volatility. Journal of Econometrics, 183(2), 181-192.

[4] Liu, L. Y., Patton, A. J., & Sheppard, K. (2015). Does anything beat 5-minute RV? A comparison of realized measures across multiple asset classes. Journal of Econometrics, 187(1), 293-311.

[5] Y.C. Lin (2020). Technical Report: HMM on winner portfolio. Gamma Paradigm Research.

YC Lin
AVP Quantitative FinanceGamma Paradigm

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