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Quant Investing: VIX Indicator Improvement

Due to high holding cost, including VIX instrument in a portfolio requires accurate market-timing. We have construct a simple moving average VIX indicator for this in previous work. And, this research points out that simple moving average indicator has several disadvantages : it generates false signals after short-term sudden fluctuations, and it has an unavoidable lag of signal while trend stop or change.

We employ Kaufman’s adaptive moving average (KAMA) to solve these disadvantages. The scheme was developed to filter out noise and was characterized by the minimal lag for trend detection. The figure below shows comparison between simple moving average and KAMA. Obviously KAMA conquers those drawbacks we mentioned before.

Orange Line is the smooth VIX indicator by KAMA, showing better fit.

With the improved VIX indicator, we can incorporate longer-term indicators to specify market condition and arrange superior asset allocation.

Petty Chen
AVP Quantitative FinanceGamma Paradigm

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