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The diversification effects of volatility-related assets

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  • Chen, Hsuan-Chi
  • Chung, San-Lin
  • Ho, Keng-Yu
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    Abstract

    We examine whether investors can improve their investment opportunity sets through the addition of volatility-related assets into various groupings of benchmark portfolios. By first analyzing the weekly returns of three VIX-related assets over the period 1996-2008 and then applying mean-variance spanning tests, we find that adding VIX-related assets does lead to a statistically significant enlargement of the investment opportunity set for investors. Our empirical findings are robust and have two implications. First, there is scope for the further development of financial products relating to volatility indexes. Second, hedge fund managers can utilize VIX futures contracts or VIX-squared portfolios to enhance their equity portfolio performance, as measured by the Sharpe ratio.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 5 (May)
    Pages: 1179-1189

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:5:p:1179-1189

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    Related research

    Keywords: Investment opportunity Mean-variance analysis VIX;

    References

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    Cited by:
    1. Cheng, Jun & Ibraimi, Meriton & Leippold, Markus & Zhang, Jin E., 2012. "A remark on Lin and Chang's paper ‘Consistent modeling of S&P 500 and VIX derivatives’," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 708-715.
    2. Wolfgang Bessler & Julian Holler & Philipp Kurmann, 2012. "Hedge funds and optimal asset allocation: Bayesian expectations and spanning tests," Financial Markets and Portfolio Management, Springer, vol. 26(1), pages 109-141, March.
    3. Caporin, Massimiliano, 2013. "Equity and CDS sector indices: Dynamic models and risk hedging," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 261-275.

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