Industry Future
25 March 2022 Financial Analysts Journal Volume 78, Issue 2

Harnessing Neuroscientific Insights to Generate Alpha

  1. Elise Payzan-LeNestour
  2. James S. Doran
  3. Talis J Putniņš
Prolonged periods of high volatility cause market participants to underestimate volatility in subsequent periods. The authors construct a trading strategy that can exploit this behavioral pattern and outperform a buy-and-hold index portfolio.
Read the Complete Article in the Financial Analysts Journal CFA Institute Member Content


Building on evidence from neuroscience and psychology, we predict that prolonged exposure to high volatility causes market participants to subsequently underestimate volatility (and vice versa), leading to predictability in stock returns. We find VIX distortions consistent with this prediction and construct a trading strategy that exploits it. Applied to SPY ETFs and VIX futures contracts, the strategy significantly outperforms a buy-and-hold index portfolio, with higher annualized performance, lower volatility, and alphas exceeding 4%.

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