Investment instruments with volatility target mechanism

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Acknowledgments

We wish to thank the anonymous Referees for a number of very helpful suggestions that helped improve presentation of this paper.

Notes

Supported by the Hausdorff Institute of Mathematics (Bonn) and by the Summer Research Grant (Bentley University).

The limitation is applied in order to ensure that in extreme market scenarios with very low volatility the VolTarget mechanism will not lead to a very aggressive allocation where a big portion of the risky asset investment is solely financed by loans. The limitation is also in line with certain regulatory requirements for mutual funds, see e.g. UCITS-compliant funds. In today’s market, a more restrictive limitation occurs in so-called VolCap portfolios.