Application of Volatility-Managed Portfolios in the Context of a Volatility Index

Abhishek Subramanian and Parthajit Kayal ()
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Parthajit Kayal: (Corresponding Author)Assistant Professor, Madras School of Economics

Working Papers from Madras School of Economics,Chennai,India

Abstract: This paper studies the volatility-managed portfolios of Moreira and Muir (2017) and analyses whether the volatility-management trading strategy provides a large utility gain for mean-variance investors for the CBOE Volatility Index (VIX) across multiple equity factors. Upon direct comparison, we document that the volatility-managed scaled factor earns higher returns compared to its original unscaled counterpart. The results from our in-sample spanning regression supports the above findings indicating that volatility-managed factors outperform the original factor by extending the mean-variance frontier even after controlling for additional factors. This result is significant in particular with the volatility-managed momentum factor. The ex-post optimization parameters also suggest a positive Sharpe ratio and CER percent (Certainty Equivalent Return) across equity factors.

Keywords: Volatility-managed portfolios; Volatility-management; Momentum (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2023-08
New Economics Papers: this item is included in nep-fmk and nep-upt
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