Study and identify volatility arbitrage opportunities in the Asian financial markets

Abstract

Volatility Arbitrage (Vol Arb in short) essentially is a quantitative/computational finance concept, which has been exploited by the modern day automatic trading systems, employing algorithm based trading, data mining, statistical methods and other techniques such as artificial neural networks etc. Wikipedia defines Volatility Arbitrage4 as one of the specific types of Statistical Arbitrage techniques, used to exploit the difference between the implied volatility of the options and forecasted future realized volatility of the option s underlying instrument. Habib (Oct, 2003)18 states that trading volatility as an asset class is still a relatively new phenomenon as an alternative investment in the hedge fund universe. The number of funds is growing and there is an increasing interest from a wide range of alternative investment investors. The expected low correlation and non trend following characteristics would suggest that they may be the key to producing a well balanced and diversified portfolio of investments.