Enhanced indexation: can volatility timing improve portfolio performance?

Qi Jiang, Chonghui Jiang and Yunbi An

Quantitative Finance, 2025, vol. 25, issue 5, 773-793

Abstract: This paper proposes a volatility timing-based enhanced indexation strategy that minimizes the variance of differences in returns between a tracking portfolio and a volatility timing benchmark. The volatility timing benchmark is formulated by embedding a dynamic volatility timing factor into the original benchmark index. We establish and solve the volatility timing-based enhanced indexation model, and find that the optimal portfolio consists of the global minimum variance portfolio and a mimicking portfolio that captures the volatility timing benchmark returns. Using data from the US and Chinese stock markets, we show that the optimal portfolio outperforms the benchmark index and seven other benchmark portfolios in terms of excess returns and risk-adjusted returns. The superior performance of the proposed strategy can be attributed to its enhanced upside participation and downside participation achieved through volatility timing.

Date: 2025
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DOI: 10.1080/14697688.2025.2490630

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