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Does your algorithm perform better in a low or high volatility regime? See how to measure its sensitivity

In February of 2018 we saw the largest single day (and week) decline in equity prices since August 2015. Ideally, a robust strategy should perform equally well in both high and low volatility regimes. In practice, it is quite common for algorithmic strategies to be sensitive to the changes to micro and macro structure of the market that can accompany volatility regime switches. Quantopian's research team shared a blog post walking through how to test your algorithm's sensitivity to volatility regimes.

You can read more about testing your strategy's volatility sensitivity in this post: https://blog.quantopian.com/risk-on-measuring-algorithm-sensitivity-to-volatility-regime-switching/

And the associated notebook is attached below.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

5 responses

Do you not need to subtract the mean from the random samples in the bootstrap?

What is the significance in making sure you have the same segment lengths in the bootstrapped data set? Would it give misleading results if you simply made sure that the number of bootstrapped high vol days equaled the same number of days as the original sample?

Thanks, Alisa for the study.

Just read this article that suggests ASX stocks are "safe haven" because of low volatility in the current geopolitical-tariffs context - thought I'd share- it's as real a regime change as a trade war going forward.

So when will Quantopian reach out to our downunder universe with Q500AU?

+1 on the Q500AU. :)

@ Michael Matthews Good question! We would like to compare apples to apples, while also making sure the samples have enough randomness. Using an equal number of bootstrapped high vol days as the number of days in the original sample has the highest randomness level, but the lowest similarity level. Using it should not give you completely misleading results, but I think the current way is more rigorous and balances the randomness level and similarity level better.

Disclaimer

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.