Paper: arXiv 2603.01298

Authors: Nikhil Devanathan, Dylan Rueter, Stephen Boyd, Emmanuel Candès, Trevor Hastie, Mykel J. Kochenderfer, Arpit Apoorv, David Soronow, Igor Zamkovsky

Abstract

This paper introduces a methodology for constructing a market index composed of a liquid risky asset and a liquid risk-free asset that achieves a fixed target volatility. Existing volatility-targeting strategies typically scale portfolio exposure inversely with a variance forecast, but such open-loop approaches suffer from high turnover, leverage spikes, and sensitivity to estimation error – issues that limit practical adoption in index construction. We propose a proportional-control approach for setting the index weights that explicitly corrects tracking error through feedback. The method requires only a few interpretable parameters, making it transparent and practical for index construction. We demonstrate in simulation that this approach is more effective at consistently achieving the target volatility than the open-loop alternative.

Complexity vs Empirical Score

  • Math Complexity: 4.5/10
  • Empirical Rigor: 6.5/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper cleanly reformulates a standard quantitative portfolio problem into a simple feedback-control tracking problem. While the mathematical tools used are relatively basic (EWMAs, clipped proportional control), the method is practical, highly readable, and well-motivated for institutional index construction.

Research Flowchart

  flowchart TD
    A["Research Goal: Construct Volatility-Targeted Index via Feedback Control"] --> B["Inputs: Liquid Risky Asset, Risk-Free Asset & Target Volatility"]
    B --> C["Open-Loop Baseline: Inverse Variance Scaling"]
    B --> D["Proposed Method: Proportional-Control Feedback Mechanism"]
    C & D --> E["Simulated Market Performance & Tracking Error Evaluation"]
    E --> F["Outcomes: Feedback Control Reduces Turnover, Leverage Spikes & Estimation Error"]

Cited References (27)

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  2. The Impact of Volatility Targeting (2018) — link
  3. Conditional Volatility Targeting (2020) — link
  4. Smoothing volatility targeting (2022) — link
  5. On the performance of volatility-managed portfolios (2020) — link
  6. A Simple Method for Predicting Covariance Matrices of Financial Returns (2023) — link
  7. Robust Global Asymptotic Stabilization of Linear Cascaded Systems With Hysteretic Interconnection (2023) — link
  8. Risk-Constrained Linear-Quadratic Regulators (2020) — link
and 19 more
  1. Robust Feedback Optimization with Model Uncertainty: A Regularization Approach (2025) — link
  2. Thrust Mixing, Saturation, and Body-Rate Control for Accurate Aggressive Quadrotor Flight (2017) — link
  3. Clipping-Based Complexity Reduction in Explicit MPC (2012) — link
  4. Linear systems with state and control constraints: the theory and application of maximal output admissible sets (1991) — link
  5. Fully Probabilistic Design for Stochastic Discrete System with Multiplicative Noise (2019) — link
  6. Adaptive Robust Quadratic Programs using Control Lyapunov and Barrier Functions (2020) — link
  7. Fractional-Order Newton-Based ESC MPPT Algorithm for PV Systems Under Dynamic Environments and Partial Shading (2025) — link
  8. Factor analysis of moving average processes (2015) — link
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  12. On the Benefit of Nonlinear Control for Robust Logarithmic Growth: Coin Flipping Games as a Demonstration Case (2023) — link
  13. On Frequency-Based Log-Optimal Portfolio With Transaction Costs (2023) — link
  14. Necessary and Sufficient Conditions for Frequency-Based Kelly Optimal Portfolio (2020) — link
  15. Portfolio selection with uncertain exit time: A robust CVaR approach (2008) — link
  16. Asymptotic Optimal Portfolio in Fast Mean-Reverting Stochastic Environments (2018) — link
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0 of 27 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.