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| Chih-hsiang Hsu |
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| ''Forecasting returns and risk through implied volatility: A dual-threshold investment framework'' |
| ( 2025, Vol. 45 No.4 ) |
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| This study explores the non-linear relationship between implied volatility and future equity returns. We document a U-shaped link between implied volatility and ETF performance across three index pairs: VIX-SPY, VXN-QQQ, and VXD-DIA, suggesting that extreme volatility may signal market rebounds. Based on this, we develop a two-threshold trading rule that reallocates between equities and bonds. Backtesting results show that the strategy improves risk-adjusted returns and reduces drawdowns relative to a buy-and-hold approach. |
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| Keywords: Implied Volatility; VIX; Passive Investing; Tactical Allocation; Risk Management |
JEL: G1 - General Financial Markets
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| Manuscript Received : Apr 15 2025 | | Manuscript Accepted : Dec 30 2025 |
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