Does the inclusion of exposure to volatility into diversified portfolio improve the investment results? Portfolio construction from the perspective of a Polish investor

Michał Latoszek and Robert Ślepaczuk
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Michał Latoszek: Faculty of Economic Sciences, University of Warsaw

No 2019-14, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: The main goal of this research is to analyse the investment benefits from an incorporation of the volatility exposure to the diversified portfolio from the perspective of a Polish investor. Volatility, treated as a new asset class, may improve the performance of the portfolio due to its negative correlation with most types of assets. This topic has been widely investigated for the United States and Europe whereas Polish market appears to be not heavily researched and this study may fill this gap. The research covers the period from October 2010 to July 2018 and is performed on the daily close prices. To construct the portfolios, the analysis uses the mean-variance framework and the naïve diversification approach. The comparison of risk-adjusted returns between investments with and without volatility exposure enables to answer the research question about an improvement of the results by the addition of a non-standard asset to the diversified portfolios. The VXX is considered as the proxy for volatility as it is the most popular ETN which follows the volatility index derivatives with the given maturity. To test the robustness of the results, the portfolios are constructed with a broad range of different parameters and assumptions imposed on the optimization procedure.

Keywords: Volatility; asset class; portfolio optimization; Polish market; Markowitz portfolio; naïve diversification (search for similar items in EconPapers)
JEL-codes: C15 C4 C45 C61 G14 G17 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2019
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https://www.wne.uw.edu.pl/index.php/download_file/5018/ First version, 2019 (application/pdf)

Related works:
Journal Article: Does the inclusion of exposure to volatility into diversified portfolio improve the investment results? Portfolio construction from the perspective of a Polish investor (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2019-14

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