India VIX Entropy Indicators for Portfolio Rotation Timing

Posted: 26 Sep 2016

See all articles by Gaurav Jadhao

Gaurav Jadhao

Indian Institute of Technology (IIT), Kharagpur

Abhijeet Chandra

Vinod Gupta School of Management, IIT Kharagpur

Date Written: May 5, 2016

Abstract

Changes in expected volatility as measured by the index of implied volatility have been used to time the portfolio rotation strategies (Copeland & Copeland, FAJ: 55, 1999; Boscaljon et al., FSR: 20, 2011). Recent literature suggest that entropy-based measures can successfully be applied to the study of financial time-series in order to overcome the nonlinear dynamics and the restrictions associated with theoretical probability distributions (Pincus &Kalman, PNAS: 101, 2004; Efremidze et al.,JoI: 23, 2014). In our study, we use sample entropy and approximate entropy indicators - derived from the India Volatility Index (India VIX) - to explore the feasibility of style, size and time horizon-based portfolio rotation strategies. We find that these two entropy-based indicators are significantly and strongly related to portfolio rotation strategy based on style and size than the strategies based on VIX percentage change signals. The study also examines the returns on portfolios consisting of several asset classes, namely equity, fixed income, and hybrid funds (exchange traded funds and mutual funds). Furthermore, we show the comparative historical portfolio performances for trading signals generated from approximate entropy, sample entropy and percentage change in India VIX.

Keywords: India VIX, sample entropy, approximate entropy, portfolio management, trading strategy

JEL Classification: C63, G11, G17

Suggested Citation

Jadhao, Gaurav and Chandra, Abhijeet, India VIX Entropy Indicators for Portfolio Rotation Timing (May 5, 2016). Available at SSRN: https://ssrn.com/abstract=2386854

Gaurav Jadhao

Indian Institute of Technology (IIT), Kharagpur ( email )

Kharagpur
IIT Khragpur
Kharagpur, IN West Bengal 721302
India

Abhijeet Chandra (Contact Author)

Vinod Gupta School of Management, IIT Kharagpur ( email )

Kharagpur, 721302
India

Register to save articles to
your library

Register

Paper statistics

Abstract Views
329
PlumX Metrics