Thursday, January 23, 2014

Comparing SPY, gold and oil volatilities

Recently I proposed an idea of a simple portfolio with volatility futures short positions on VIX (S&P 500 volatility index), GVZ (gold volatility index), OVX (oil volatility index). Now there is a question how correlated are the volatilities of equities, gold and oil. I’ve made some research.

I calculate volatility as the average logarithm of a daily price change in 21 daily bars rolling window.

Volatility of GLD ( gold ETF, black color plot) and SPY (ETF on S&P 500, red color plot):


Scatter plot diagram with logarithms of volatilities of GLD and SPY:


Correlation: 0.53

The same research for oil.

Volatility of USO (ETF on oil, black color plot) and SPY (ETF on S&P 500, red color plot):


Scatter plot:



Oil/equities volatility correlation is significantly higher: 0.73


Conclusion: it is reasonable to diversify such a portfolio using VIX and GVZ futures, but adding OVX is redundant, especially considering its relative lack of liquidity.

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