Portfolio Evaluation of Volatility Timing and Reward to Risk Timing Investment Strategies: The Brazilian Case

Revista de Finanças Aplicadas, v. 7, n. 2, p. 1-19, 2016.

19 Pages Posted: 6 Mar 2018

See all articles by Robert Aldo Iquiapaza

Robert Aldo Iquiapaza

Federal University of Minas Gerais (UFMG) - Center for Post Graduation and Research in Administration (CEPEAD)

Gustavo Fiuza Costa Vaz

Federal University of Minas Gerais (UFMG) - Cioncias Economicas

Sergio Louro Borges

Federal University of Minas Gerais (UFMG) - Center for Post Graduation and Research in Administration (CEPEAD)

Date Written: August 19, 2016

Abstract

OBJECTIVES This research aimed to verify the performance of the Volatility Timing (VT) and Reward to Risk Timing (RRT) models of portfolio selection when compared with the Naïve and Mean-Variance ones, applied to the Brazilian stock market.

METHODOLOGY The methodology consists in applying the VT, RRT, Naïve and the Mean-Variance portfolio strategies, considering different tuning levels of rebalancing portfolios. The assets employed in the analysis were those included in the Ibovespa Index in the period from January of 2004 through December of 2014. We used statistical and financial indicators to measure the performance of the strategies, and measure its turnover and transaction costs.

RESULTS AND CONCLUSIONS It was possible to compare strategies against the Minimum Variance (Wvm) portfolio, the Ibovespa (Ibov) and the Naïve portfolios. The Ibov and Naïve presented the lowest portfolios returns. In the other the hand the Wvm, VT and RRT, with high investors aggressiveness in favor to less volatile assets (η=4), had the highest performance (monthly Sharpe Index 6.6%, 5.98% and 5.08%, respectively). In addition, the VT4 and the Wvm portfolios consistently preserved a low turnover. However, the RRT portfolios presented high turnover. Analyzed by sub-periods, the results pointed out that the best choice of portfolio depends upon the Brazilian economic scenario. During the first sub period RRTbm4 had the best results with 45.65% annualized return and a 223.7% Sharpe Ratio. In the second sub period the RRTk4 featured with a 21.33% annualized return and a Sharpe Ratio of 62.33%. In the last sub period, however, no strategies presented positive returns or Sharpe Ratios.

PRACTICAL ISSUES This research evidenced that the best choice of portfolio strategies depends upon the economic setting that the Brazilian market is undergoing, because some of the strategies had better results in specific periods. However, in most cases, portfolios that give more weights to less volatile assets, such as minimum variance, and volatility timing and reward to risk timing with η=4, would produce better performance (Sharpe Ratio) without significant increase in transaction costs.

Keywords: Portfolio selection, Volatility Timing, Reward to Risk Timing

JEL Classification: G11, G23

Suggested Citation

Iquiapaza, Robert Aldo and Vaz, Gustavo and Borges, Sergio, Portfolio Evaluation of Volatility Timing and Reward to Risk Timing Investment Strategies: The Brazilian Case (August 19, 2016). Revista de Finanças Aplicadas, v. 7, n. 2, p. 1-19, 2016. , Available at SSRN: https://ssrn.com/abstract=3130797

Robert Aldo Iquiapaza (Contact Author)

Federal University of Minas Gerais (UFMG) - Center for Post Graduation and Research in Administration (CEPEAD) ( email )

Av. Antônio Carlos 6627 - Pampulha
Faculdade de Ciências Econômicas
Belo Horizonte, MG 31270-901
Brazil

HOME PAGE: http://www.cepead.face.ufmg.br

Gustavo Vaz

Federal University of Minas Gerais (UFMG) - Cioncias Economicas

Brazil

Sergio Borges

Federal University of Minas Gerais (UFMG) - Center for Post Graduation and Research in Administration (CEPEAD) ( email )

Rua Curitiba 832 11º And Centro
Belo Horizonte, MG 30120170
Brazil

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