PERFORMANCE OF VOLATILITY ASSET AS HEDGE FOR INVESTOR’S PORTFOLIO AGAINST STRESS EVENTS: COVID-19 AND THE 2008 FINANCIAL CRISIS

The COVID-19 pandemic event was quite uniquely characterised by frequent large jumps in asset prices within a short span of time compared to the 2008 Financial crisis. The study seeks to explore volatility as an asset class and explore its hedging performance under stress events under the two black swan effects i.e., COVID-19 and the 2008 financial crisis. Empirical results show that  holding 5% to 1% of the portfolio allocation in a volatility-related asset class would have provided  portfolio insurance against the two black swan events. Further, a  portfolio of equity, debt, commodity, and bitcoins performance can be matched or outperformed with a portfolio of equity, debt, and volatility asset class and with a lesser number of stocks under each category.

The results were consistent while maximising the Sortino ratio as well and the portfolio was tending towards the one observed under maximising Sharpe ratio by increasing the target returns. This conveys that a combination of equity, bond, and the volatility asset class is sufficient to hedge against stress events.

As the volatility index (VIX) was not tradable we studied  actively traded VIX ETFs in the portfolio which outperforms  the portfolio without VIX ETFs during the COVID-19 pandemic. However, the level of outperformance (expected return and volatility) was slightly reduced with VIX ETFs when compared with VIX.