Single-Asset Adaptive Leveraged Volatility Control
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arXiv
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| Main Authors: | , , , , , , , , |
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| Format: | Preprint |
| Published: |
2026
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| _version_ | 1866914432327614464 |
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| author | Devanathan, Nikhil Rueter, Dylan Boyd, Stephen Candès, Emmanuel Hastie, Trevor Kochenderfer, Mykel J. Apoorv, Arpit Soronow, David Zamkovsky, Igor |
| author_facet | Devanathan, Nikhil Rueter, Dylan Boyd, Stephen Candès, Emmanuel Hastie, Trevor Kochenderfer, Mykel J. Apoorv, Arpit Soronow, David Zamkovsky, Igor |
| contents | This paper introduces a methodology for constructing a market index composed of a liquid risky asset and a liquid risk-free asset that achieves a fixed target volatility. Existing volatility-targeting strategies typically scale portfolio exposure inversely with a variance forecast, but such open-loop approaches suffer from high turnover, leverage spikes, and sensitivity to estimation error -- issues that limit practical adoption in index construction. We propose a proportional-control approach for setting the index weights that explicitly corrects tracking error through feedback. The method requires only a few interpretable parameters, making it transparent and practical for index construction. We demonstrate in simulation that this approach is more effective at consistently achieving the target volatility than the open-loop alternative. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2603_01298 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Single-Asset Adaptive Leveraged Volatility Control Devanathan, Nikhil Rueter, Dylan Boyd, Stephen Candès, Emmanuel Hastie, Trevor Kochenderfer, Mykel J. Apoorv, Arpit Soronow, David Zamkovsky, Igor Portfolio Management Optimization and Control 91B28 This paper introduces a methodology for constructing a market index composed of a liquid risky asset and a liquid risk-free asset that achieves a fixed target volatility. Existing volatility-targeting strategies typically scale portfolio exposure inversely with a variance forecast, but such open-loop approaches suffer from high turnover, leverage spikes, and sensitivity to estimation error -- issues that limit practical adoption in index construction. We propose a proportional-control approach for setting the index weights that explicitly corrects tracking error through feedback. The method requires only a few interpretable parameters, making it transparent and practical for index construction. We demonstrate in simulation that this approach is more effective at consistently achieving the target volatility than the open-loop alternative. |
| title | Single-Asset Adaptive Leveraged Volatility Control |
| topic | Portfolio Management Optimization and Control 91B28 |
| url | https://arxiv.org/abs/2603.01298 |