A conservative discontinuous target volatility strategy

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The asset management sector is constantly looking for a reliable investment strategy, which is able to keep its promises. One of the most used approaches is the target volatility strategy that combines a risky asset with a risk-free trying to maintain the portfolio volatility constant over time. Several analyses highlight that such target is fulfilled on average, but in periods of crisis, the portfolio still suffers market’s turmoils. In this paper, the authors introduce an innovative target volatility strategy: the discontinuous target volatility. Such approach turns out to be more conservative in high volatility periods. Moreover, the authors compare the adoption of the VIX Index as a risk measure instead of the classical standard deviation and show whether the former is better than the latter. In the last section, the authors also extend the analysis to remove the risk-free assumption and to include the correlation structure between two risky assets. Empirical results on a wide time span show the capability of the new proposed strategy to enhance the portfolio performance in terms of standard measures and according to stochastic dominance theory.

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    • Figure 1. Comparative results for the TVS STD portfolio and the S&P 500
    • Figure 2. Comparative results for the TVS VIX portfolio and the S&P 500
    • Figure 3. Comparative results for the DTVS STD portfolio and the S&P 500
    • Figure 4. Comparative results for the DTVS VIX portfolio and the S&P 500
    • Figure 5. Comparative results for the TVS STD portfolio and the S&P 500
    • Figure 6. Comparative results for the TVS VIX portfolio and the S&P 500
    • Figure 7. Comparative results for the DTVS STD portfolio and the S&P 500
    • Figure 8. Comparative results for the DTVS VIX portfolio and the S&P 500
    • Figure 9. Volatility structure of S&P 500 and 3-month Treasury Bill rate
    • Table 1. Portfolio statistics for constant frequency rebalancing case
    • Table 2. Portfolio statistics for rebalancing buffer case
    • Table 3. Portfolio statistics for rebalancing buffer case removing risk-free assumption
    • Table 4. Dominance relations between the strategies and the S&P 500 index