Exploiting Volatility Movements in the Sydney Futures Exchange's Bank Bill Contract
|Author(s):||Ben Hunt & Ram Bhar|
|Date of publication:||September 1991|
|Working paper number:||8|
An appropriate stochastic model was fitted to one year data on the implied volatility of options on 90 day bank accepted bill futures contracts traded in the Sydney Futures Exchange. The model used was ARIMA augmnented with day of the week variables, an option time to maturity variable, and recent values of historic volatility. The high ex-post predicitive accuract of the model was then employed as the central elemnet of a strategy of buy low / sell high volatility. We employed two trading schemes with suitability constructed Delta neutral portfolios comprising bill futures and call and put options on those futures over a period of 6 months, to test whether speculative trading profit could be earned. The existence of trading profits before transaction costs validated the potential of the buy low /sell high volatility strategies to generate speculative profits. The absence of any such trading profits after transaction costs however, showed that the market pricing of these securities is such that the dependencies within implied volatility can not be profitably exploited. This result may be interpreted as evidence supporting an hypothesis of semi-strong form market efficiency.
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|Comments:||Published as: Hunt, B. F. and Bhar, R., 1993, "Exploiting Volatility Movements in the Sydney Futures Exchange's Bank Bill Contract", International Review of Economics and Finance, 2(4), 403-415.|