Implements the following volatility strategy: Each day, hold XIV if contango is
xiv.cutpoint, hold VXX if contango is less than
vxx.cutpoint, and hold cash otherwise.
1 2 3 4 5 6
Numeric vector of contango values at the end of each trading day (or week, month, etc.).
Numeric vector of gains for XIV. Should be same length as
Numeric vector of gains for VXX. Should be same length as
Numeric value giving the contango cutpoint for XIV. For example, if
Numeric value giving the contango cutpoint for VXX. For example, if
Numeric value giving the initial value of the portfolio.
You can find historical contango values from The Intelligent Investor Blog. You can click the first link at http://investing.kuchita.com/2012/06/28/xiv-data-and-pricing-model-since-vix-futures-available-2004/ to download a zip file containing an Excel spreadsheet. Then, you will need to calculate whatever version of "contango" you prefer. I typically define contango as what percent higher the second-month VIX futures are acompared to the first- month futures, i.e. dividing the "2nd mth" column by the "1st mth" column, subtracting 1, and then multiplying by 100.
I think the most common approach for contango-based volatility strategies is
holding XIV (inverse volatility) when contango is above some value (e.g. 0%,
5%, or 10%), and holding cash otherwise. You can do that with this function by
-Inf. However, you may also want to hold
VXX (volatility) when contango is below some value (e.g. 0%, -5%, -10%), also
known as "backwardation". You can implement an XIV-only, VXX-only, or XIV and
VXX strategy with this function.
To load daily gains for XIV and/or VXX, you can use
which uses the quantmod package  to load data from Yahoo! Finance. You
will have to specify the
to inputs to match the date
range for your contango values.
A 4-element list containing the following: (1) A character vector named
holdings indicating what fund was held each day (XIV, VXX, or cash); (2)
a numeric vector named
port.gains giving the portfolio gain for each day,
which will be 0 for days that cash was held and the XIV or VXX gain for days
that XIV or VXX was held; (3) a numeric vector named
the portfolio balance each day; and (4) a numeric value named
giving the total number of trades that were executed.
Dane R. Van Domelen
1. Jeffrey A. Ryan (2016). quantmod: Quantitative Financial Modelling Framework. R package version 0.4-6, https://cran.r-project.org/package=quantmod.
Acknowledgment: This material is based upon work supported by the National Science Foundation Graduate Research Fellowship under Grant No. DGE-0940903.
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