When the bond-arbitrage strategy dried up, one of the strategies LTCM employed was volatility arbitrage. Let us examine how profitable this is, with a twist. Calculate the GARCH (2,1) volatility of the S&P 500 from 1999 through April 2019. Calculate the daily differences between this series and the VIX index (VIX-GARCH). Now calculate 1 day ahead S&P 500 returns
Form 10-volatility difference baskets (highest to lowest) from the 1999 to 2019 estimation sample, and report what the annualized average return and standard deviation is for each basket. Also report the GARCH parameters.
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