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

46 Pages Posted: 27 Nov 2017 Last revised: 18 Jan 2018

See all articles by Elvira Caloiero

Elvira Caloiero

Bocconi University

Massimo Guidolin

Bocconi University - Department of Finance

Date Written: November 1, 2017


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-Traded Notes, Optimal Asset Allocation

JEL Classification: G11, G12

Suggested Citation

Caloiero, Elvira and Guidolin, Massimo, Volatility as an Alternative Asset Class: Does It Improve Portfolio Performance? (November 1, 2017). BAFFI CAREFIN Centre Research Paper No. 2017-63, Available at SSRN: https://ssrn.com/abstract=3076929 or http://dx.doi.org/10.2139/ssrn.3076929

Elvira Caloiero

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136

Massimo Guidolin (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136

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