Cyclicality in Stock Market Volatility and Optimal Portfolio Allocation

In 'STOCK MARKET VOLATILITY', Chapter 10, pp. 195-208, Greg Gregoriou, ed., Chapman & Hall, 2009

Posted: 20 Mar 2010 Last revised: 28 Dec 2016

See all articles by Jason C. Hsu

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Feifei Li

Research Affiliates, LLC

Date Written: November 2, 2010

Abstract

Stock market volatility is not constant over time. It exhibits cyclicality, with higher volatility in bear market cycles and lower volatility in bull market cycles. Failure to take into account this cyclicality would lead to sub-optimal portfolio performance and could result in improper risk management. We illustrate in this chapter how to model this cyclicality in market volatility using a simple 2-stage Markov model. The approach is significantly more intuitive and tractable than other models of dynamic market volatility.

Keywords: Conditional Volatility, Risk Management, Portfolio Choice

JEL Classification: G10, G11

Suggested Citation

Hsu, Jason C. and Li, Feifei, Cyclicality in Stock Market Volatility and Optimal Portfolio Allocation (November 2, 2010). In 'STOCK MARKET VOLATILITY', Chapter 10, pp. 195-208, Greg Gregoriou, ed., Chapman & Hall, 2009. Available at SSRN: https://ssrn.com/abstract=1574963

Jason C. Hsu (Contact Author)

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Feifei Li

Research Affiliates, LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8753 (Phone)
949-325-8953 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

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