Home / Ideas / Single-Asset Realized-Volatility Targeting
Single-Asset Realized-Volatility Targeting
scale equity-index exposure up/down to hold constant target vol
Moreira & Muir (2017, JF) show that reducing exposure when realized vol is high raises Sharpe and cuts drawdowns because vol is not offset by proportionally higher expected returns; Harvey et al. and Alpha Architect confirm 15–50% risk-adjusted-return improvement for equity/credit. Fits the current low-realized-vol regime (stays near fully invested now, auto-brakes on the next spike).
Universe
A single broad equity-index ETF — SPY (extendable to QQQ or a 60/40 SPY+IEF base portfolio).
How it works
Target ~10–12% annualized vol; each day set leverage = target_vol / 20-day (EWMA) realized vol, cap leverage at ~1.5–2.0, apply with a two-day lag, cash/short-rate on the uninvested sleeve, rebalance weekly.
Expected performance
Research-derived Sharpe estimate: 0.4–0.7.
Backtest this idea with SignalChain
This is a research lead — not a finished backtest. SignalChain takes an idea like this and runs the whole pipeline inside Claude Code: it researches the concept against academic and practitioner sources, sets benchmarks, writes and lints a VectorBT backtest, runs it, and grades the result PASS/FAIL. One command:
/signalchain volatility-targeting overlay on SPY: daily leverage = 11% target / 20d-EWMA realized vol, cap 2x, two-day lag, weekly rebalance
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Research & sources
- papers.ssrn.com — papers.ssrn.com
- quantpedia.com — quantpedia.com
- alphaarchitect.com — alphaarchitect.com
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