Volatility-Managed Portfolio: Does It Really Work?

Journal of Portfolio Management, Forthcoming

Posted: 13 Nov 2018 Last revised: 18 Oct 2019

See all articles by Fang Liu

Fang Liu

Cornell University

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Date Written: June 5, 2019

Abstract

In this article, the authors find that a typical application of volatility-timing strategies to the stock market suffers from a look-ahead bias, despite existing evidence on successes of the strategies at the stock level. After correcting the bias, the strategy becomes very difficult to implement in practice as its maximum drawdown is 68--93% in almost all cases. Moreover, the strategy outperforms the market only during the financial crisis period. The authors also consider three alternative volatility-timing strategies and find that they do not outperform the market either. Their results show that one cannot easily beat the market via timing the market alone.

Suggested Citation

Liu, Fang and Tang, Xiaoxiao and Zhou, Guofu, Volatility-Managed Portfolio: Does It Really Work? (June 5, 2019). Journal of Portfolio Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3283395

Fang Liu (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

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