Dynamic Asset Allocation Strategies Based on Unexpected Volatility
Posted: 21 May 2019 Last revised: 21 Jun 2014
Date Written: November 21, 2013
Abstract
In this paper we document that at the aggregate stock market level the unexpected volatility is negatively related to expected future returns and positively related to future volatility. We demonstrate how the predictive ability of unexpected volatility can be utilized in dynamic asset allocation strategies that deliver a substantial improvement in risk-adjusted performance as compared to traditional buy-and-hold strategies. In addition, we demonstrate that active strategies based on unexpected volatility outperform the popular active strategy with volatility target mechanism and have the edge over the widely reputed market timing strategy with 10-month simple moving average rule.
Keywords: unexpected volatility, return predictability, dynamic asset allocation
JEL Classification: G11, G12, G14, G17
Suggested Citation: Suggested Citation
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