PT  - JOURNAL ARTICLE
AU  - Ryan Poirier
TI  - Volatility Managed Indexes: The Importance of Intraday Data
AID  - 10.3905/jii.2021.1.112
DP  - 2021 Nov 17
TA  - The Journal of Index Investing
PG  - jii.2021.1.112
4099  - https://pm-research.com/content/early/2021/11/17/jii.2021.1.112.short
4100  - https://pm-research.com/content/early/2021/11/17/jii.2021.1.112.full
AB  - Modern volatility managed indexes employ antiquated close-to-close volatility models to scale exposure. This has material consequences on the option pricing dynamics for structured investments, many of which reference a volatility managed index because of option pricing benefits associated with the constant volatility. The author tests two daily close-to-close models and three intraday “realized volatility” models that leverage the rich information dynamics found in intraday data. The results, across three highly liquid US large-cap indexes, suggest that the latter three models produce more consistent volatility profiles, or alternatively, a lower volatility of volatility, without sacrificing performance (i.e., the Sharpe ratio). All else being equal, this lower volatility of volatility should be preferred by product issuers and investors because of the resulting option pricing benefits.