VIX-managed portfolios

Miloš Božović

International Review of Financial Analysis, 2024, vol. 95, issue PA

Abstract: We propose a simple portfolio management strategy that gauges the leverage based on the observed implied volatility index (VIX). The strategy involves taking less risk when the cumulative previous-month VIX is high and more when it is low. We show that the strategy yields more stable weights and thus requires less rebalancing than comparable strategies based on realized volatility. As a result, it produces substantially higher spanning regression alphas when transaction costs are taken into account. We document this for ten equity factors, six classes of mean–variance efficient portfolios and 176 anomaly portfolios. We argue that the superior performance of the VIX-based strategy is driven by its ability to time volatility and tail risk simultaneously, resulting from the forward-looking nature of the information entailed in the index and the higher-order return moments embedded in the implied volatility smile.

Keywords: Implied volatility; Downside variance; Transaction costs; Volatility timing; Tail risk (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:95:y:2024:i:pa:s1057521924002850

DOI: 10.1016/j.irfa.2024.103353

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