Volatility as an Alternative asset Class: Does It Improve Portfolio Performance?

Elvira Caloiero and Massimo Guidolin

No 1763, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: We investigate the potential role of Exchange Traded Products (Notes) as vehicles to trade volatility (here proxied by the VIX index) as an asset class in a fully optimizing asset allocation framework, subject to long-only constraints. In back-testing, recursive exercises based on an expanding window of data from February 2010 to February 2016, we find evidence that VIX should enter with non-negligible weight most portfolio strategies and that under many circumstances, long VIX positions may generate positive risk-adjusted performance benefits. However, the volatility positions that can be managed and traded through (one of) the most popular US exchange-traded notes (VXX) fails to deliver such realized, out-of-sample benefits under all utility functions and for a range of assumptions on investors’ risk aversion. Even though the turnover implied by VXX does not appear excessive, taking into account transaction costs worsens considerably its performance and even casts doubts as to whether volatility ought to be considered as an alternative asset class altogether. Direct strategies that trade appropriate futures on the VIX improve somewhat realized performance, but not enough to tilt over the balance of our conclusions.

Keywords: Volatility; VIX; Exchange-Traded Products; Exchange (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2017
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://repec.unibocconi.it/baffic/baf/papers/cbafwp1763.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:baf:cbafwp:cbafwp1763

Access Statistics for this paper

More papers in BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy Via Röntgen, 1 - 20136 Milano - Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Michela Pozzi ().