This is a test of Don’t Fear the Bear’s StDev Model for trading VIX ETPs like XIV and VXX. This strategy is of the slower-moving variety, averaging less than five trades a year. It spends 89% of days in XIV (inverse volatility), but shifts to VXX (long volatility) when volatility rises above a certain threshold.
Strategy results from mid-2004 to present:
Go long VXX at the close when the 10-day standard deviation of daily % changes in the VIX index rises above 11%. Hold VXX until the 10-day standard deviation falls below 10%. Invest in XIV when not invested in VXX.
Wonk notes: Transaction costs and slippage are assumed to total 0.1% of each trade (0.2% round-trip). Return on cash has been ignored. Data prior to the launch of each ETP has been simulated back to 2004. We’re able to do this accurately using a combination of the indices and the futures data on which these ETPs are based. Read more about simulating data for VIX ETPs.
As with all VIX ETP strategies (including our own), a dash of extra skepticism of results is warranted given how little data (< 11 years) and how few trades we have to consider, but to date, backtested performance has been strong. Note the significant underperformance over the last 1+ year; this will be something to monitor moving forward.
If I had to pick on something, it would be the use of a plain vanilla standard deviation measurement. Conceptually, I don’t like the idea of some random trading day 2 weeks ago being as important as today was in deciding whether I should enter a trade. I would much prefer to see something like a weighted standard deviation used.
A big thank you to Don’t Fear the Bear for sharing this strategy.
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When the strategies that we cover on our blog (including this one) signal new trades, we include an alert on the daily report sent to subscribers. This is completely unrelated to and separate from our own strategy’s signal; it just serves to add a little color to the daily report and allow subscribers to see what other quantitative strategies are saying about the market.
Click to see Volatility Made Simple’s own elegant solution to the VIX ETP puzzle.
Volatility Made Simple