if i were to regress a funds return against a stock market volatility index and find that the fund has negative beta in times of rising volatility, what does this imply? what type of risk is the fund exposed to?
It means that the fund or stock tends to do well when volatility rises. I think you could consider it a defensive play in a rising volatility environment. You probably would want to have a multifactor model though, where you have both market returns and recent volatility scores (at least). Then you could interpret the coefficient as an expected outperformance for higher volatility environments.
Make sure it’s covariance stationary without a unit root. Really glad I got to use so much of that knowledge a week and a half ago. Might have to be my new pick-up line this summer. Hahahha…
Maybe they are selling puts to increase their return?
Ooops, I got the sign wrong, negative beta on a volatility index means that it does well in low volatility, and therefore has higher risk in choppy markets.
First, how do you define “times of rising volatility”? Second, when you say “negative beta”, do you mean negative beta w/r/t the vol index or some other equity index? Also, are you implying the fund has positive beta during periods of falling vol? If the fund has negative beta to the vol index, that doesn’t tell you much, because most equities and equity funds will have negative beta to a vol index. However, if you mean negative beta on an equity index, and also positive beta to an equity index during periods of falling vol, you’ve got some kind of super fund which never goes down (assuming equity indexes and vol indexes remain negatively correlated, which appears reasonable).
negative beta genreally means the fund is net short
maybe they have plenty of gold mining cos/HUI/XUI in the fund.
wel… the answer was short vol risk. i dont understand how negative beta ties in with short vol risk.
the market beta is 1. a security with beta above or below 1 simply means it is more or less sensitive to the market price vol. so, then what is the difference between a beta of 0 and a negative beta? just the fact that the negative beta moves more inversely to the mkt?
pacmandefense Wrote: ------------------------------------------------------- > the market beta is 1. a security with beta above > or below 1 simply means it is more or less > sensitive to the market price vol. so, then what > is the difference between a beta of 0 and a > negative beta? just the fact that the negative > beta moves more inversely to the mkt? Are you using beta as sensitivity to vol changes or market changes? Because if you are using beta as sensitivity to market changes you are saying that during high vol, the considered stock is negatively correlated to market moves, and I assume it has positive beta during low vol. If you are using beta as sensitivity to vol changes, you are saying that stock prices have negative correlation to vol. Depending on how you define vol, that makes sense. For example, VIX and S&P 500 are negatively correlated. Could you clarify your question?
beta is sensitivity to overall stock market (S&P 500)
Beta is sensitivity to whatever variable you’ve put in the regression. In this case it’s the volatility index (not clear from the OP if it’s vol index level, or if it’s change in vol index level). However, the regression should have an overall market factor in there, at least as a control variable, because the relationship between vol and market performance is likely to mess up the interpretation, otherwise.