On the Performance of Volatility-Managed Portfolios

70 Pages Posted: 18 Apr 2019

See all articles by Scott Cederburg

Scott Cederburg

University of Arizona - Department of Finance

Michael S. O'Doherty

University of Missouri at Columbia - Department of Finance

Feifei Wang

Miami University of Ohio

Xuemin Sterling Yan

Lehigh University - College of Business

Date Written: March 20, 2019

Abstract

Using a comprehensive set of 103 equity strategies, we analyze the value of volatility-managed portfolios for real-time investors. Volatility-managed portfolios do not systematically outperform their corresponding unmanaged portfolios in direct comparisons. Consistent with Moreira and Muir (2017), volatility-managed portfolios tend to exhibit significantly positive alphas in spanning regressions. However, the trading strategies implied by these regressions are not implementable in real time, and reasonable out-of-sample versions generally earn lower certainty equivalent returns and Sharpe ratios than do simple investments in the original, unmanaged portfolios. This poor out-of-sample performance for volatility-managed portfolios stems primarily from structural instability in the underlying spanning regressions.

Keywords: volatility-managed portfolios, portfolio choice

JEL Classification: G10, G11, G12

Suggested Citation

Cederburg, Scott and O'Doherty, Michael S. and Wang, Feifei and Yan, Xuemin Sterling, On the Performance of Volatility-Managed Portfolios (March 20, 2019). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3357038

Scott Cederburg

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Michael S. O'Doherty (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

Robert J. Trulaske, Sr. College of Business
401 Cornell Hall
Columbia, MO 65211
United States

Feifei Wang

Miami University of Ohio ( email )

Oxford, OH 45056
United States

Xuemin Sterling Yan

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

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