India VIX Entropy Indicators for Portfolio Rotation Timing
Posted: 26 Sep 2016
Date Written: May 5, 2016
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: Suggested Citation