We can harness neuroscientific insights to generate alpha

Elise Payzan-LeNestour and James Doran  | UNSW  |  03 June 2022  |  0.50 CE

Building on evidence from neuroscience and psychology, prolonged exposure to high volatility causes market participants to subsequently underestimate volatility (and vice versa), leading to predictability in stock returns. Distortions in the CBOE Volatility Index (VIX) are consistent with this finding, and investors can construct a trading strategy which exploits the effect. Applied to S&P 500 exchange-traded funds and VIX futures contracts, such a strategy significantly outperforms a buy-and-hold index portfolio, with higher annualised performance, low...

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