Enhancing Portfolio Performance and VIX Futures Trading Timing with Markov-Switching GARCH Models

In the present paper, we test the use of Markov-Switching (MS) models with time-fixed or Generalized Autoregressive Conditional Heteroskedasticity (GARCH) variances. This, to enhance the performance of a U.S. dollar-based portfolio that invest in the S&P 500 (SP500) stock index, the 3-month U.S. Treasury-bill (T-BILL) or the 1-month volatility index (VIX) futures. For the investment algorithm, we propose the use of two and three-regime, Gaussian and t-Student, MS and MS-GARCH models. This is done to forecast the probability of high volatility episodes in the SP500 and to determine the investment level in each asset. To test the algorithm, we simulated 8 portfolios that invested in these three assets, in a weekly basis from 23 December 2005 to 14 August 2020. Our results suggest that the use of MS and MS-GARCH models and VIX futures leads the simulated portfolio to outperform a buy and hold strategy in the SP500. Also, we found that this result holds only in high and extreme volatility periods. As a recommendation for practitioners, we found that our investment algorithm must be used only by institutional investors, given the impact of stock trading fees.

Bitcoin, VIX futures and CDS: a triangle for hedging the international equity portfolios

PurposeIn this paper, our aim is to estimate the time varying correlations between Bitcoin, VIX futures and CDS indexes and to examine in what ways these assets can act as beneficial hedge and safe haven mechanisms, useful for facing, or attenuating, the major world equity markets related risks and volatilities.Design/methodology/approachOur methodology consists to model each pair equity/asset indices by bivariate symmetric and asymmetric dynamic conditional models (A) DCC to evaluate the portfolio design associated implications on both daily and weekly collected data base, with regard to the period ranging from July, 2010 to January 2018. To assess the extent to which the Bitcoin, VIX futures and sovereign CDS may stand as diversifiers, i.e. as hedging or safe haven instruments against the various stock indexes, we adopt the same method applied by Baur and Lucey (2010).FindingsEmpirical results show that the hedging and safe haven roles associated with the three hedging instruments tend to differ noticeably across time horizons and model used. The interest brought about by treating this issue is twofold. On the one hand, it should provide useful guidelines to investors through helping them opt for the most effective and beneficial strategies, whereby they could efficiently hedge the equity markets related extreme risks and volatilities. On the other hand, it is intended to highlight the applied models' specifications associated impacts.Research limitations/implicationsThe interest brought about by treating this issue is twofold. On the one hand, it should provide useful guidelines to investors and financial advisors through helping them opt for the most effective and beneficial of the strategies, whereby they could efficiently hedge the equity markets related extreme risks and volatilities. On the other hand, it is intended to highlight the applied models' specifications associated impacts.Originality/valueStudy of Bitcoin can be considered as safe haven or hedge or diversifier instrument. Compare between Bitcoin, VIX and CDs.