Volatility-Managed Portfolios: True Market-Timing with a False Theory?

30 Pages Posted: 2 Jun 2019

See all articles by Shuxin Guo

Shuxin Guo

Southwest Jiaotong University - School of Economics & Management

Qiang Liu

Southwestern University of Finance and Economics - School of Finance

Date Written: May 9, 2019

Abstract

The volatility-managed portfolio (VMP) offers an appealing market-timing strategy (Moreira and Muir, Journal of Finance, 2017). Unfortunately, an important theoretical result for VMP and the foundation of the paper’s empirical study, namely the arbitrariness of the constant c in the portfolio weight factor, seem questionable. We prove that the VMP alpha from a slightly modified theory isn’t guaranteed to be positive under any circumstance, casting doubt on the Moreira-Muir results. In a case with inferable positive Moreira-Muir alphas, our simulations show that statistically significant alphas are rare and volatility-managed portfolios frequently lose all investments, contradicting the Moreira-Muir theory.

Keywords: volatility-managed portfolio; market-timing strategy; Moreira-Muir alpha; compounding-based VMP theory

JEL Classification: G11, G10

Suggested Citation

Guo, Shuxin and Liu, Qiang, Volatility-Managed Portfolios: True Market-Timing with a False Theory? (May 9, 2019). Available at SSRN: https://ssrn.com/abstract=3385377 or http://dx.doi.org/10.2139/ssrn.3385377

Shuxin Guo

Southwest Jiaotong University - School of Economics & Management ( email )

No. 111, Sec. North 1, Er-Huan Rd.
Chengdu
Chengdu, Sichuan 610031
China

Qiang Liu (Contact Author)

Southwestern University of Finance and Economics - School of Finance ( email )

423 Gezhi Building
555 Liutai Boulevard, Wenjiang
Chengdu, Sichuan 611130
China

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