Volatility as an asset class: Holding VIX in a portfolio |
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Authors: | James S Doran |
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Institution: | School of Banking and Finance, University of New South Wales, Sydney, New South Wales, Australia |
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Abstract: | Hedging market downturns without sacrificing upside has long been sought by investors. If VIX was directly investable, adding it as a hedge to the S&P 500 would result in significantly improved performance over the equity only portfolio. However, tradable VIX products do not provide the hedge or returns investors seek over long-term horizons. Alternatively, deconstructing VIX to find the key S&P 500 options which drive VIX movements leads to a synthetic VIX portfolio that provides a more effective hedge. Using these options captures correlations and returns similar to VIX, and combined with the S&P 500, outperforms the buy-and-hold index portfolio. |
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Keywords: | portfolio returns S&P 500 index VIX index volatility |
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