Single-Asset Adaptive Leveraged Volatility Control

N. Devanathan, D. Rueter, S. Boyd, E. Candès, T. Hastie, M. Kochenderfer, A. Apoorv, D. Soronow, and I. Zamkovsky

Manuscript, 2026.

• Current version

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.