Volatility as an Asset Class: Holding VIX in a Portfolio
Journal of Futures Markets, Forthcoming
29 Pages Posted: 27 Jan 2020
Date Written: January 2, 2020
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.
Keywords: VIX index, S&P 500 Index, Portfolio Returns, Volatility
JEL Classification: G11, G12
Suggested Citation: Suggested Citation