Risk Indicators

During the fiscal crisis of 2008, I wrote about how I watched some risk indicators such every bit the VIX or the TED spread  to create upward one's heed what leverage I should use for my trading strategies. It turns out that this physical care for is simply every bit critical for the electrical current crisis that began inward August 2011. In fact, to a greater extent than than leverage-determinants, they tin locomote used every bit the all-important variable that determines whether a for certain strategy should locomote run at all. (What's the betoken of running a model that y'all mean value volition lose coin amongst depression leverage?)


There are instantly to a greater extent than than a few of these risk indicators to selection from. Besides the VIX in addition to the TED, at that topographic point are the VSTOXX (EURO STOXX fifty Volatility), the VXY (JPMorgan G7 Volatility Index), the EM-VXY (JPMorgan Emerging Market Volatility Index), the ETF's ONN and OFF, in addition to belike many to a greater extent than that I haven't heard of yet. 


A lot of academic enquiry has been done on whether nosotros tin devise "regime switching" models based on some complicated pattern-recognition algorithms to create upward one's heed whether a marketplace is inward a for certain "regime" which favors this or that item model or parameter set. And often, these authorities switching models rely on the recognition of some complicated laid upward of patterns inward the historical cost series. Sorry to say, I accept non establish whatever of these complex authorities switching model to accept whatever existent out-of-sample predictive power. On the other hand, my enquiry shows that some of the aforementioned elementary risk indicators volition indeed forestall some trading models from falling off the cliff.


But which of these indicators are applicable to which model? This is non so obvious. For example, y'all powerfulness mean value that the EM-VXY would locomote an ideal leading indicator for Forex trading models that demand emerging marketplace currencies, but I accept establish that it is solely a contemporaneous (and hence useless) indicator to mine. Another example, I said during the 2008 fiscal crisis that VIX seems to locomote a useless contemporaneous indicator for equities trading models, but strangely, it is a expert leading indicator for FX models. In contrast, the TED spread that everyone were obsessed close inward 2008 shot upward to over 300 bps then, but never went beyond 100 bps this fourth dimension around. So actually solely rigorous backtesting tin guide us here.


What risk indicators produce y'all use? And accept y'all actually backtested their efficacies? Your comments would locomote real welcome here.