The profitability of trading volatility using real-valued and symbolic models

There are two notions of volatility in literature: historical volatility and implied volatility. We concentrate on the latter by analyzing the profitability of a pure volatility trading strategy which is delta-neutral and independent of an option pricing model, for the German stock index DAX. Several very different methods ranging from linear and nonlinear, real-valued models to symbolic models of volatility changes are applied to predict the change in volatility to the next trading day and to gain profits by buying or selling straddles accordingly. The trading performance is evaluated for one historical and one implied volatility measure. The results are carefully evaluated concerning transaction costs, stationarity issues, and statistical significance. The main contribution of the paper is that, for the first time, the trading performance of models based on different modelling paradigms is compared