The Economic Value of Volatility Timing Using 'Realized' Volatility

Rice University, Jones Graduate School Working Paper

48 Pages Posted: 21 Jul 2001

See all articles by Jeff Fleming

Jeff Fleming

Rice University - Jesse H. Jones Graduate School of Business

Chris Kirby

UNC Charlotte - Belk College of Business

Barbara Ostdiek

Rice University - Jesse H. Jones Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 29, 2001

Abstract

Recent work suggests that intradaily returns can be used to construct estimates of daily return volatility that are more precise than those constructed using daily returns. We measure the economic value of this "realized" volatility approach in the context of investment decisions. Our results indicate that the value of switching from daily to intradaily returns to estimate the conditional covariance matix can be substantial. We estimate that a risk-averse investor would be willing to pay 50 to 200 basis points per year to capture the observed gains in portfolio performance. Moreover,these gains are robust to transaction costs, estimation risk regarding expected returns, and the performance measurement horizon.

Keywords: Realized volatility, volatility timing, tactical asset allocation, portfolio optimization, mean-variance analysis

JEL Classification: G11, C14

Suggested Citation

Fleming, Jeff and Kirby, Chris and Ostdiek, Barbara, The Economic Value of Volatility Timing Using 'Realized' Volatility (December 29, 2001). Rice University, Jones Graduate School Working Paper. Available at SSRN: https://ssrn.com/abstract=276921 or http://dx.doi.org/10.2139/ssrn.276921

Jeff Fleming (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713-348-4677 (Phone)
713-348-5251 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~jfleming

Chris Kirby

UNC Charlotte - Belk College of Business ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Barbara Ostdiek

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713-348-5384 (Phone)
713-348-5251 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
830
Abstract Views
2,861
rank
27,911
PlumX Metrics