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Volatility as a new class of assets? The advantages of using volatility index futures in investment strategies

Author

Listed:
  • Juliusz Jabłecki

    () (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)

  • Ryszard Kokoszczyński

    () (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)

  • Paweł Sakowski

    () (Faculty of Economic Sciences, University of Warsaw)

  • Robert Ślepaczuk

    () (Faculty of Economic Sciences, University of Warsaw; Union Investment TFI S.A.)

  • Piotr Wójcik

    () (Faculty of Economic Sciences, University of Warsaw)

Abstract

This paper investigates the changes in the investment portfolio performance after including VIX. We apply different models for optimal portfolio selection (Markowitz and Black-Litterman) assuming both the possibility of short sale and the lack of it. We also use various assets, data frequencies, and investment horizons to get a comprehensive picture of our results’ robustness. Investment strategies including VIX futures do not always deliver higher returns or higher Sharpe ratios for the period 2006-2013. Their performance is quite sensitive to changes in model parameters. However, including VIX significantly increases the returns in almost all cases during the recent financial crisis. This result clearly emphasizes potential gains of having such an asset in the portfolio in case of very high volatility in financial markets.

Suggested Citation

  • Juliusz Jabłecki & Ryszard Kokoszczyński & Paweł Sakowski & Robert Ślepaczuk & Piotr Wójcik, 2014. "Volatility as a new class of assets? The advantages of using volatility index futures in investment strategies," Working Papers 2014-26, Faculty of Economic Sciences, University of Warsaw.
  • Handle: RePEc:war:wpaper:2014-26
    as

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    File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP143.pdf
    File Function: First version, 2014
    Download Restriction: no

    References listed on IDEAS

    as
    1. Marie Briere & Alexandre Burgues & Ombretta Signori, 2008. "Volatility Exposure for Strategic Asset Allocation," Working Papers CEB 08-034.RS, ULB -- Universite Libre de Bruxelles.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    volatility; VIX futures; investment strategies; optimal portfolio selection; Markowitz model; Black-Litterman model;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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