ABSTRACT Managed portfolios that take less risk when volatility is high produce large alphas, increase Sharpe ratios, and produce large utility gains for mean-variance investors. We document this for the market, value, momentum, profitability, return on equity, investment, and betting-against-beta factors, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in volatility are not offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions. This rules out typical risk-based explanations and is a challenge to structural models of time-varying expected returns.
Description
Volatility‐Managed Portfolios - MOREIRA - 2017 - The Journal of Finance - Wiley Online Library
%0 Journal Article
%1 https://doi.org/10.1111/jofi.12513
%A MOREIRA, ALAN
%A MUIR, TYLER
%D 2017
%J The Journal of Finance
%K BA vol_timing
%N 4
%P 1611-1644
%R https://doi.org/10.1111/jofi.12513
%T Volatility-Managed Portfolios
%U https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12513
%V 72
%X ABSTRACT Managed portfolios that take less risk when volatility is high produce large alphas, increase Sharpe ratios, and produce large utility gains for mean-variance investors. We document this for the market, value, momentum, profitability, return on equity, investment, and betting-against-beta factors, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in volatility are not offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions. This rules out typical risk-based explanations and is a challenge to structural models of time-varying expected returns.
@article{https://doi.org/10.1111/jofi.12513,
abstract = {ABSTRACT Managed portfolios that take less risk when volatility is high produce large alphas, increase Sharpe ratios, and produce large utility gains for mean-variance investors. We document this for the market, value, momentum, profitability, return on equity, investment, and betting-against-beta factors, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in volatility are not offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions. This rules out typical risk-based explanations and is a challenge to structural models of time-varying expected returns.},
added-at = {2021-12-18T13:10:23.000+0100},
author = {MOREIRA, ALAN and MUIR, TYLER},
biburl = {https://puma.ub.uni-stuttgart.de/bibtex/2f75de47cd87f117398b6afd925f2578a/georglender},
description = {Volatility‐Managed Portfolios - MOREIRA - 2017 - The Journal of Finance - Wiley Online Library},
doi = {https://doi.org/10.1111/jofi.12513},
eprint = {https://onlinelibrary.wiley.com/doi/pdf/10.1111/jofi.12513},
interhash = {546ed6c10bce536f92ccd67a15519fb4},
intrahash = {f75de47cd87f117398b6afd925f2578a},
journal = {The Journal of Finance},
keywords = {BA vol_timing},
number = 4,
pages = {1611-1644},
timestamp = {2021-12-18T13:44:40.000+0100},
title = {Volatility-Managed Portfolios},
url = {https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12513},
volume = 72,
year = 2017
}
