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   Investment Thoughts - Academia

Volatility Managed Portfolios

 

Abstract

 

Managed portfolios that take less risk when volatility is high produce large, positive alphas and increase factor Sharpe ratios by substantial amounts. We document this fact for the market, value, momentum, profitability, return on equity, and investment factors in equities, as well as the currency carry trade. Our portfolio timing strategies are simple to implement in real time and are contrary to conventional wisdom because volatility tends to be high after the onset of recessions and crises when selling is typically viewed as a mistake. Instead, our strategy earns high average returns while taking less risk in recessions.

 

We study the portfolio choice implications of these results. We find volatility timing provides large utility gains to a mean variance investor, with increases in lifetime utility around 75%. We then study the problem of a long-horizon investor and show that, perhaps surprisingly, long-horizon investors can benefit from volatility timing even when time variation in volatility is completely driven by discount rate volatility. The facts pose a challenge to equilibrium asset pricing models because they imply that effective risk aversion and the price of risk would have to be low in bad times when volatility is high, and vice versa.

 

 

Yale University, February 1, 2016-Alan Moreira, Tyler Muir

18.02.2016


 

Themes

 

Asia

Bonds

Bubbles and Crashes

Business Cycles
Central Banks

China

Commodities
Contrarian

Corporates

Creative Destruction
Credit Crunch

Currencies

Current Account

Deflation
Depression 

Equity
Europe
Financial Crisis
Fiscal Policy

Germany

Gloom and Doom
Gold

Government Debt

Historical Patterns

Household Debt
Inflation

Interest Rates

Japan

Market Timing

Misperceptions

Monetary Policy
Oil
Panics
Permabears
PIIGS
Predictions

Productivity
Real Estate

Seasonality

Sovereign Bonds
Systemic Risk

Switzerland

Tail Risk

Technology

Tipping Point
Trade Balance

U.S.A.
Uncertainty

Valuations

Yield