RT Journal Article
SR Electronic
T1 The FTSE StableRisk Indices
JF The Journal of Index Investing
FD Institutional Investor Journals
SP 12
OP 35
DO 10.3905/jii.2011.2.2.012
VO 2
IS 2
A1 Chafkin, Jeremiah H.
A1 Lo, Andrew W.
A1 Sinnott, Robert W.
YR 2011
UL http://jii.pm-research.com/content/2/2/12.abstract
AB Implicit in most asset-allocation policies is the statistical assumption of “stationarity,” which means that the means, variances, and covariances of asset returns are assumed to be constant over time. This assumption is a reasonable approximation during normal market conditions but fails dramatically during periods of market turmoil and dislocation. In such periods, market volatility is highly dynamic, correlations can jump to 100% in a matter of days, and risk premia can become negative for months at a time. FTSE and AlphaSimplex Group have developed a family of rule-driven (passive), transparent, and high-capacity indices whose volatilities are rescaled as often as daily with the goal of maintaining more stable risk levels. By stabilizing the risk of each asset class over time, the FTSE StableRisk Indices have the potential to capture the long-term risk premia of asset classes and simple strategies with less severe maximum drawdowns than those of traditional indices, which have no risk controls.