Quantitative methods · Advanced · Daily monitoring
Rolling Hurst Exponent
How it works, and when it doesn't.
The VRP averages +4-6 volatility points annually. This persistent premium exists because the demand for portfolio protection always slightly exceeds the supply of volatility sellers.
Holding SPY
Hurst H=0.605 — trending DOWN. Price 759.8 below SMA50=764.5. Downtrend trending persistently. Short.
Why it works
The Volatility Risk Premium (VRP = VIX minus 21-day realized volatility) has been positive roughly 85% of trading days since 2000. Implied volatility persistently overstates actual future volatility because investors overpay for portfolio insurance. When the premium is wide and VIX is declining, going long equity harvests this premium systematically.
The signal logic
- Compute 21-day realized volatility of SPY (annualized %)
- VRP = VIX level minus realized volatility
- Long: VRP > 2.0 AND VIX below its 30-day moving average
- Exit: VRP drops below 0 OR VIX spikes above 30
- Ridge regression model provides probabilistic VRP forecast
When it fails
VIX spike events cause sudden large losses: COVID (VIX=85), Aug 2024 carry unwind, 2018 Volmageddon. The VIX > 30 exit rule limits but does not eliminate tail risk.
- Best market
- Low-volatility bull markets where VIX stays below 20 (2017, 2019, 2021, 2023)
- Worst market
- Volatility regime changes — sudden transitions from low-vol to high-vol
Backtest
| Sharpe ratio | -0.44 |
| Annual return | -6.7% |
| Worst drawdown | -32.6% |
| Trades in the backtest | 166 |
Backtest on daily bars, positions taken the bar after the signal (no look-ahead).
Rolling Hurst Exponent, live.
Re-scored after every close.
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