The diversification effects of volatility-related assets
Journal
Journal of Banking and Finance
Journal Volume
35
Journal Issue
5
Pages
1179-1189
Date Issued
2011
Author(s)
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. ? 2010 Elsevier B.V.
Subjects
Investment opportunity
Mean-variance analysis
VIX
Type
journal article