Should investors invest in volatility ? Evidence from the volatility derivatives market.

Abstract

This paper investigates whether investors can improve their investment opportunity set that consists of traditional asset classes through the addition of VIX-related assets (Spot VIX and futures on VIX). First, we revisit the posed question within an in-sample setting by employing mean-variance and non-mean-variance spanning tests. To the best of our knowledge no previously published study has ever examined the results of non mean-variance spanning regarding VIX-related assets. Then, we form optimal portfolios by taking into account the higher order moments of the portfolio returns distribution and evaluate their out-of-sample performance. Under the in-sample setting, we find that VIX-related assets are beneficial both to mean-variance and to non mean-variance investors. Furthermore, these benefits are preserved out-of-sample. Our findings confirm the diversification benefits of VIX-related assets and are robust across a number of performance evaluation measures ,utility functions and datasets. The results hold even when transaction costs are considered .