Price of Risk: Are Volatility-Controlled Indices Priceless?

Using data on a set of volatility-controlled indexes (VCIs), called the S&P 500 Engle Indices, which use intraday transaction prices to implement an intraday volatility control mechanism based on multiplicative component GARCH forecasts, we show that these indices consistently maintain realized volatility close to their target levels while delivering higher risk-adjusted returns than the S&P 500 Index across both low- and high-volatility environments. In addition to achieving their volatility objectives, these indices exhibit particularly strong performance during periods of extreme market stress. We provide a theoretical framework demonstrating that such performance is consistent with a time-varying price of risk, under which volatility-managed strategies can improve Sharpe ratios relative to the underlying asset. Consistent with this explanation, we find that these indices generate statistically significant abnormal returns across multiple factor model specifications. These findings suggest that volatility-controlled indexes may offer a practical approach to improving portfolio efficiency, with potential applications in exchange-traded funds and other investment products.