A couple of not so well-known strategies in the relative value universe are stub trading and volatility arbitrage. In stub trading, the fund manager is identifying price discrepancies among stocks that own a large stake in another company. This is based on the principle that the market does not recognize the additional value of the secondary company to the owning company's business. When the market eventually sees this and prices the security accordingly, the manager can sell out the position.
Volatility arbitrage uses the same philosophy as other strategies - buy the undervalued and sell short the overvalued securities and profit when they converge. Here the securities are options and warrants on an asset. Using various mathematical models, the manager calculates the implied volatility of an asset. The undervalued option can be identified using the Mean Reversion (compares implied and historical volatility of a security) or Generalized Autoregressive Conditional Heteroskedasticity (compares implied and forecasted volatility of a security) model.
No comments:
Post a Comment