Target Volatility: Are There Benefits for Domestic and International Investors?

Abstract

This paper compares quarterly rebalanced equity/bond portfolios with 2 different target volatility approaches and a stress allocation model that switches between a normal and a stress allocation during times of high volatility. The analysis comprises the 5 countries Germany, Japan, US, UK and Switzerland and takes the perspectives of purely domestic as well as international investors. Generally, target volatility strategies enhance performance metrics irrespective of investors’ domestic or international orientation. The results developed in this paper can have important implications for, for example, life-cycle products, pension funds and their regulators as well as robo-advisors that utilise target volatility to express investors’ risk attitudes.

Keywords: International diversification, Optimization, Rebalancing, Risk budget, Target volatility, Volatility information

JEL Classification: G11, G15, G32, C58