Volatility management plays a central role in index-linked annuities and systematic investment strategies, where dynamic exposure adjustments are used to maintain a targeted risk profile across different market regimes. Yet many volatility-controlled indexes currently available rely on models that struggle to reflect observed market behavior. In particular, risk exposure updates are typically driven by noisy, backward-looking return-based signals, which can result in inefficient and untimely exposure decisions. Industry practice remains largely anchored in variants of the exponentially weighted moving average (EWMA) model for volatility forecasting. While widely adopted for its simplicity and robustness, EWMA presents challenges of signal-stability trade-off and lagged response that must be taken into account when being used in product designs for volatility control indexes. Also, historical volatility models by design cannot incorporate forward-looking, event-driven risks.

To address these limitations, we discuss in this paper InnovatIV, a forward-looking volatility-forecasting framework that leverages information embedded in options markets. By extracting a short-term variance strike from liquid option chains, InnovatIV captures the market’s consensus expectation of near-term volatility, rather than relying exclusively on lagged price dynamics.

After an introductory segment on the content of option-based volatility forecasts, this paper:

• Describes the extraction of market-implied short-term volatility from option prices
• Outlines the bias-adjustment methodology
• Describes the InnovatIV volatility forecast methodology and juxtaposes it with the commonly used EWMA methodology
• Presents formal arguments supporting the superiority of the proposed framework
• Applies the InnovatIV forecast to the construction of an excess-return target-volatility index
• Provides empirical evidence showing that InnovatIV reduces realized volatility dispersion, improves allocation efficiency, and enhances long-run risk-adjusted performance