Interesting Volatility Research

Interesting article at Alpha Architect about two research papers pertaining to volatility.

The first has to do with idiosyncratic volatility (“IV”), and how higher IV leads to short-sale contraints, which leads to overvaluation, and subsequent bigger declines. Research that I performed last year confirmed that stocks with the biggest short sale contraints fell the hardest. By looking for stocks with the most negative borrow rates, we are able to easily identify stocks that you want to avoid. All it takes is a click of a button.

The second has to do with volatility of volatility. That is, the historical volatility of implied volatility. Researchers found that the stocks with wildly fluctuating implied volatility tend to perform the worst. This, too, is a scan we have built into ODDS Online. It’s the top scan in the screen capture from our software. Just a click of a button and you’ll get a list of stocks that are most likely to underperform.

Given the massive size of our database, there is a lot we can do. If you have any thoughts for a potential scan you’d like to see, drop us a note. We’d be happy to consider your idea.