Risk Exposure of Trend-Following Strategy to Long Equity Volatility

• Main Authors: Hung-Shen Chen, 陳宏慎
• Other Authors: 林月能
• Format: Others
• Language: en_US
• Published: 2013
• Online Access: http://ndltd.ncl.edu.tw/handle/u4dskc

碩士 === 國立中興大學 === 財務金融系所 === 101 === Trend-following strategies have been thought as long equity volatility strategies because they have better performance when economy is in extreme states and less well when economy is in normal states. Fung and Hsieh (2001) showed that PTFS factors have better explanatory power than the linear factors. This thesis regresses trend-following monthly returns against the five PTFS factors in different economy states as well as in different states of the percentage changes of VIX to see if the trend-following index has return exposure to any specific PTFS factor in each state scenario. Kaminski (2012) mentioned that if trend-following strategies are really long equity volatility, then trend-following should have high and positive correlation with equity volatility changes. This thesis calculates the correlation coefficients between trend-following monthly returns and the changes of one-month standard deviations of S&P 500 index returns to see the relationship between trend-following and the changes of volatility. This investigation can see if trend-following strategies are really long equity volatility strategies. The results show that trend-follower index exposed to PTFSBD when economy is in depression state or when the percentage changes of VIX increase, and exposed to PTFSFX and PTFSCOM when economy is in boom state or when the percentage changes of VIX decline. Further, trend-following strategy is not always a long equity volatility strategy because it does not always have positive correlation to the changes of volatility. Given the analyses above, the reason that the payoffs of trend-following strategy have a U-shaped pattern across states of MSCI World Index monthly returns is attributed to the fact that trend followers are capable of investing in different markets in accordance with different states, not because trend-following strategy is a long equity volatility strategy.