Single-Asset Adaptive Leveraged Volatility Control

Nikhil Devanathan, Dylan Rueter, Stephen Boyd, Emmanuel Cand\`es, Trevor Hastie, Mykel J. Kochenderfer, Arpit Apoorv, David Soronow and Igor Zamkovsky

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Abstract: This paper introduces a methodology for constructing a market index composed of a liquid risky asset and a liquid risk-free asset that achieves a fixed target volatility. Existing volatility-targeting strategies typically scale portfolio exposure inversely with a variance forecast, but such open-loop approaches suffer from high turnover, leverage spikes, and sensitivity to estimation error -- issues that limit practical adoption in index construction. We propose a proportional-control approach for setting the index weights that explicitly corrects tracking error through feedback. The method requires only a few interpretable parameters, making it transparent and practical for index construction. We demonstrate in simulation that this approach is more effective at consistently achieving the target volatility than the open-loop alternative.

Date: 2026-03, Revised 2026-03
New Economics Papers: this item is included in nep-rmg
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