Systemic Risk Centre Seminar

Date: Monday, 21st March 2022   Time: 1.00 - 2.00pm GMT
Venue: Room 1.06, The Marshall Building, LSE (map) or online via Zoom
Speaker: Steven Heston (University of Maryland)
Seminar Topic: Seasonal Momentum in Variance Risk Premia

AbstractThis paper proposes a new approach for implementing "equity VIX portfolios'' in settings where the number of traded options is limited. The resulting values are the prices of portfolios designed to best replicate the payoffs of variance swaps, and they are also interpretable as implied variances. We show that our approach outperforms other methods, such as the CBOE's own VIX formula, both in artificial and actual data. Using these portfolios, we document seasonal momentum in option returns, the tendency of stocks whose options performed well at periodic lags to continue their good performance in the future. A long-short portfolio based on seasonal momentum achieves a pre-cost Sharpe ratio of 3.05 annualized.