Volatility-Managed Portfolios

76 Pages Posted: 12 Sep 2015 Last revised: 8 Mar 2017

Alan Moreira

University of Rochester - Simon Business School

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 2016

Abstract

Managed portfolios that take less risk when volatility is high produce large alphas, substantially increase factor Sharpe ratios, and produce large utility gains for mean-variance investors. We document this for the market, value, momentum, profitability, return on equity, and investment factors in equities, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in factors' volatilities are not fully offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions and crises yet still earns high average returns. This rules out typical risk-based explanations and is a challenge to structural models of time-varying expected returns.

Suggested Citation

Moreira, Alan and Muir, Tyler, Volatility-Managed Portfolios (October 25, 2016). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2659431 or http://dx.doi.org/10.2139/ssrn.2659431

Alan Moreira

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Tyler Muir (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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