A Markov-Switching VSTOXX Trading Algorithm for Enhancing EUR Stock Portfolio Performance

In the present paper, we test benefit of using Markov-Switching models and volatility futures diversification in a Euro-based stock portfolio. With weekly data Eurostoxx 50 (ESTOXX50) index, forecasted smoothed regime-specific probabilities at T + 1 used them as weighting method diversified portfolio ESTOXX50 ESTOSS50 index (VSTOXX) futures. estimated from 9 July 2009 to 29 September 2020, simulated performance three theoretical investors who paid different trading costs invested during calm periods (low regime) or VSTOXX three-month German treasury bills distressed highly (high extreme regimes). Our results suggest that benefits hold short-term, but if given investor manages two-asset with our portfolios, portfolio’s is enhanced significantly, long term, presence costs. These are use practitioners for algorithmic active applications ETFs