Reconciling Ex Post and Ex Ante Volatility Figures

6 Pages Posted: 11 Mar 2013 Last revised: 12 Mar 2013

Date Written: February 28, 2013

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

Suggested Citation

Steiner, Andreas, Reconciling Ex Post and Ex Ante Volatility Figures (February 28, 2013). Available at SSRN: https://ssrn.com/abstract=2231195 or http://dx.doi.org/10.2139/ssrn.2231195

Andreas Steiner (Contact Author)

Andreas Steiner Consulting GmbH ( email )

Walderstrasse 43c
Hinwil, 8340
Switzerland

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