Dynamic Asset Allocation Strategies Based on Unexpected Volatility

6 Pages Posted: 21 Nov 2013 Last revised: 21 Jun 2014

Valeriy Zakamulin

University of Agder - School of Business and Law

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

Zakamulin, Valeriy, Dynamic Asset Allocation Strategies Based on Unexpected Volatility (November 21, 2013). Journal of Alternative Investments, Vol. 16, No. 4, 2014. Available at SSRN: https://ssrn.com/abstract=2357881 or http://dx.doi.org/10.2139/ssrn.2357881

Valeriy Zakamulin (Contact Author)

University of Agder - School of Business and Law ( email )

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Kristiansand, N-4604
Norway
+47 38141039 (Phone)

HOME PAGE: http://vzakamulin.weebly.com/

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