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Article

Constructing Equity Market–Neutral VIX Portfolios with Dynamic CAPM

Jiaqi Chen and Michael L. Tindall
The Journal of Alternative Investments Fall 2016, 19 (2) 70-87; DOI: https://doi.org/10.3905/jai.2016.19.2.070
Jiaqi Chen
is a financial industry analyst at the Federal Reserve Bank of Dallas in Dallas, TX.
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  • For correspondence: jiaqi.chen@dal.frb.org
Michael L. Tindall
is an alternative investments specialist at the Federal Reserve Bank of Dallas in Dallas, TX.
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  • For correspondence: michael.tindall@dal.frb.org
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Abstract

Many hedge funds that claim to be market-neutral produce returns that are highly correlated with the returns of market benchmarks. Fast-changing correlations among asset classes make it difficult to construct market-neutral portfolios intended to reduce overall risk while generating positive alpha. This article examines methods of constructing actively managed portfolios of Chicago Board Options Exchange (CBOE) Volatility Index derivatives that reduce portfolio correlation with the equity market. The authors find that the Kalman filter–based dynamic capital asset pricing model (CAPM) produces the best results. This approach is capable of constructing equity market–neutral portfolios with positive alpha. In addition, dynamic CAPM provides a way to estimate the equivalent option “Greeks” for VIX derivatives.

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The Journal of Alternative Investments: 19 (2)
The Journal of Alternative Investments
Vol. 19, Issue 2
Fall 2016
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Constructing Equity Market–Neutral VIX Portfolios with Dynamic CAPM
Jiaqi Chen, Michael L. Tindall
The Journal of Alternative Investments Sep 2016, 19 (2) 70-87; DOI: 10.3905/jai.2016.19.2.070

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Constructing Equity Market–Neutral VIX Portfolios with Dynamic CAPM
Jiaqi Chen, Michael L. Tindall
The Journal of Alternative Investments Sep 2016, 19 (2) 70-87; DOI: 10.3905/jai.2016.19.2.070
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  • Article
    • Abstract
    • VIX FUTURES INDEXES AND KEY STATISTICS
    • DYNAMIC CAPM
    • AN OPERATIONAL EMN PORTFOLIO-CONSTRUCTION METHOD
    • ROBUSTNESS CHECKS
    • CONCLUSION
    • REFERENCES
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