Reconciling Ex Post and Ex Ante Volatility Figures

Abstract

Ex post volatility is defined as dispersion of ex post portfolio returns over the measurement period. Ex post volatility takes into account the variability in asset returns and changes of asset weights over time due to trading and drift. Ex ante volatility, on the other hand, is defined as forward-looking portfolio volatility calculated from current assets weights and asset covariance estimates. Except in very unrealistic circumstances, the two volatility measurements will typically differ.

In this research note, we propose a Brinson-style attribution scheme that can be used to quantify the effects. Being able to attribute differences in ex ante and ex post volatilities to trading and risk surprises provides valuable information in investment process reviews for internal purposes as well as client communications.

Keywords: ex ante, ex post, volatility, risk, model, Brinson, attribution

JEL Classification: G11, G20