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A portfolio insurance strategy for volatility index (VIX) futures

Author

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  • Jung, Young Cheol

Abstract

This paper proposes a methodology using VIX futures as an investment asset while controlling downside risk. For this purpose, three portfolio insurance (PI) strategies are built by using option-based portfolio insurance (OBPI) and constant proportion (CPPI) for VIX futures. The effectiveness of the strategy is tested by historical return simulation of eight subsamples and a full sample for the period of Feb. 2007–Jan. 2015. We evaluate the performance of each strategy first as a pure investment tool and then as a diversification tool for S&P500 index. In the subsample simulation, all PI strategies perfectly protect its floor. Protective Put and CPPI appropriately catch up with strong and trendy bull markets of VIX futures. Resetting achieves a considerable return for the periods of return-reversal. In the full-sample simulation, the daily mean returns of the PI strategy are all greater than the benchmark's. The PI strategy is also a good diversification tool for S&P500 index.

Suggested Citation

  • Jung, Young Cheol, 2016. "A portfolio insurance strategy for volatility index (VIX) futures," The Quarterly Review of Economics and Finance, Elsevier, vol. 60(C), pages 189-200.
    • Handle: RePEc:eee:quaeco:v:60:y:2016:i:c:p:189-200
    DOI: 10.1016/j.qref.2015.09.001
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    Citations

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    Cited by:

    1. Oscar V. De la Torre-Torres & Evaristo Galeana-Figueroa & José Álvarez-García, 2021. "A Markov-Switching VSTOXX Trading Algorithm for Enhancing EUR Stock Portfolio Performance," Mathematics, MDPI, vol. 9(9), pages 1-28, May.
    2. Hsiu-Chuan Lee & Donald Lien & Her-Jiun Sheu, 2023. "Hedging performance of volatility index futures: a partial cointegration approach," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 265-294, July.
    3. Vera Ivanyuk, 2022. "Proposed Model of a Dynamic Investment Portfolio with an Adaptive Strategy," Mathematics, MDPI, vol. 10(23), pages 1-19, November.
    4. Raza, Naveed & Ali, Sajid & Shahzad, Syed Jawad Hussain & Rehman, Mobeen Ur & Salman, Aneel, 2019. "Can alternative hedging assets add value to Islamic-conventional portfolio mix: Evidence from MGARCH models," Resources Policy, Elsevier, vol. 61(C), pages 210-230.
    5. Ali, Sajid & Raza, Naveed & Vinh Vo, Xuan & Le, Van, 2022. "Modelling the joint dynamics of financial assets using MGARCH family models: Insights into hedging and diversification strategies," Resources Policy, Elsevier, vol. 78(C).
    6. Oscar V. De la Torre-Torres & Francisco Venegas-Martínez & Mᵃ Isabel Martínez-Torre-Enciso, 2021. "Enhancing Portfolio Performance and VIX Futures Trading Timing with Markov-Switching GARCH Models," Mathematics, MDPI, vol. 9(2), pages 1-22, January.
    7. Guglielmo Maria Caporale & Luis A. Gil-Alana & Trilochan Tripathy, 2018. "Persistence in the Russian Stock Market Volatility Indices," CESifo Working Paper Series 7243, CESifo.
    8. Degiannakis, Stavros & Filis, George & Hassani, Hossein, 2018. "Forecasting global stock market implied volatility indices," Journal of Empirical Finance, Elsevier, vol. 46(C), pages 111-129.
    9. Saffet Akdag & Ömer İskenderoglu & Andrew Adewale Alola, 2020. "The volatility spillover effects among risk appetite indexes: insight from the VIX and the rise," Letters in Spatial and Resource Sciences, Springer, vol. 13(1), pages 49-65, April.
    10. Wenhui Zhang & Yongmin Su & Ruimin Ke & Xinqiang Chen, 2018. "Evaluating the influential priority of the factors on insurance loss of public transit," PLOS ONE, Public Library of Science, vol. 13(1), pages 1-11, January.
    11. Robiyanto Robiyanto & Bayu Adi Nugroho & Eka Handriani & Andrian Dolfriandra Huruta, 2020. "Hedge effectiveness of put replication, gold, and oil on ASEAN-5 equities," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-29, December.
    12. Degiannakis, Stavros & Filis, George, 2022. "Oil price volatility forecasts: What do investors need to know?," Journal of International Money and Finance, Elsevier, vol. 123(C).

    More about this item

    Keywords

    VIX; VIX futures; VVIX; Portfolio insurance; OBPI; CPPI;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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