The diversification effects of volatility-related assets

Chen, Hsuan‐Chi; Chung, San‐Lin; Ho, Keng-Yu

doi:10.1016/j.jbankfin.2010.09.024

Cited by 50 publications

(33 citation statements)

References 42 publications

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“…The authors do not employ an out-of-sample analysis and the sample ends in 2010. Chen et al (2011) use a mean-variance approach to add VIX futures to four base French (1992, 1993) US stock portfolios. Again, only an in-sample analysis is presented and the sample ends in 2008.…”

Section: Literature Reviewmentioning

confidence: 99%

Diversification with volatility products

Alexander

Korovilas²,

Kapraun

2016

Journal of International Money and Finance

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Recent changes to clearing-house regulations have promoted exchange-traded products offering risk premia previously accessible only over-the-counter. Thus, as correlations increase between equity, bonds and commodities, a new strand of research questions the benefits of home-grown diversification using volatility products. First we ask: "What expected returns will induce equity and bond investors to perceive ex-ante diversification benefits from adding volatility?" We call this the optimal diversification threshold. We derive the theoretical thresholds for minimum-variance, mean-variance and Black-Litterman optimization. Empirical analysis of US and European markets shows that volatility diversification is frequently perceived to be optimal, ex-ante, but these apparent benefits are almost never realized, being eroded by high roll and transaction costs. Exchange-traded volatility only proved an effective diversifier during the banking crisis. At other times long equity and bond portfolios diversified with volatility futures have not performed as well as those without diversification, or even those diversified with commodities.JEL classification: G11, G15, G23

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Section: Literature Reviewmentioning

confidence: 99%

Diversification with volatility products

Alexander

Korovilas²,

Kapraun

2016

Journal of International Money and Finance

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“…For instance, Petrella (2005) and Eun et al (2008) employ this methodology to examine the diversification benefits of small-cap stocks. Likewise, Kroencke and Schindler (2012) examine the benefits of international diversification in real estate using mean-variance spanning, while Chen et al (2011) examines the diversification benefits of volatility. However, to date, the approach has not been used in the literature on listed infrastructure.…”

Section: Methodsmentioning

confidence: 99%

“…As a result, the null hypothesis assumes that a combination of the existing benchmark assets is capable of replicating the returns of the test assets with a lower variance. Chen et al (2011) describe the null hypothesis as:…”

Section: Methodsmentioning

confidence: 99%

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Searching for a listed infrastructure asset class using mean–variance spanning

Blanc-Brude¹,

Whittaker²,

Wilde

2017

Financ Mark Portf Manag

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This study examines the portfolio-diversification benefits of listed infrastructure stocks. We employ three different definitions of listed infrastructure and tests of mean-variance spanning. The evidence shows that viewing infrastructure as an asset class is misguided. We employ different schemes of infrastructure asset selection (both traditional asset classes and factor exposures) and discover that they do not provide portfolio-diversification benefits to existing asset allocation choices. We also find that defining and selecting infrastructure investments by business model as opposed to industrial sectors can reveal a very different investment profile, albeit one that improves the mean-variance efficient frontier since the global financial crisis. This study provides new insights into defining and benchmarking infrastructure equity investments in general, as well as into the extent to which public markets can be used to proxy the risk-adjusted performance of privately held infrastructure investments.

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“…The VIX Index itself is not tradable, but the CBOE began trading futures contracts on the VIX on Since the introduction of VIX futures, various VIX-related instruments have been formulated (see Alexander and Korovilas [2013]). Researchers and practitioners have become increasingly interested in VIX derivatives in terms of their use in both (1) volatility selling (see Carr and Wu [2009]; Rhoads [2011]; Sinclair [2013]) and (2) portfolio protection strategies (Dash and Moran [2005]; Chen, Chung, and Ho [2011]; Mencía and Sentana [2013]). …”

mentioning

confidence: 99%