Machine Learning Volatility Targeting of Equity Indices

Forecasting Stock Market Volatility and Application to Volatility Timing Portfolios

AuthorsDohyun Chun; Hoon Cho; Doojin Ryu

Paper linkhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=4167561

Invest in S&P 500 and T-bills using weekly volatility predictions from Lasso regression. Adjust allocations to target risk, increasing exposure in low-volatility periods and reducing it in high-volatility periods.

Volatility targeting protects investors during high-risk periods and exploits low-risk periods. Machine learning improves prediction accuracy over historical volatility, enabling robust forward-looking allocation decisions using Lasso regression.