The Economic Value of Volatility Timing Using 'Realized' Volatility

Posted: 20 Nov 2002

See all articles by Jeff Fleming

Jeff Fleming

Rice University - Jesse H. Jones Graduate School of Business

Chris Kirby

UNC Charlotte - Belk College of Business

Barbara Ostdiek

Rice University - Jesse H. Jones Graduate School of Business

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Abstract

Recent work suggests that intradaily returns can be used to construct estimates of daily return volatility that are more precise than those constructed using daily returns. We measure the economic value of this "realized" volatility approach in the context of investment decisions. Our results indicate that the value of switching from daily to intradaily returns to estimate the conditional covariance matrix can be substantial. We estimate that a risk-averse investor would be willing to pay 50 to 200 basis points per year to capture the observed gains in portfolio performance. Moreover, these gains are robust to transaction costs, estimation risk regarding expected returns, and the performance measurement horizon.

Keywords: volatility timing, realized volatility, portfolio optimization, mean-variance analysis, rolling estimators

JEL Classification: G11, G14

Suggested Citation

Fleming, Jeff and Kirby, Chris and Ostdiek, Barbara, The Economic Value of Volatility Timing Using 'Realized' Volatility. Journal of Financial Economics, Vol. 67, No. 3, March 2003. Available at SSRN: https://ssrn.com/abstract=338682

Jeff Fleming (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
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713-348-4677 (Phone)
713-348-5251 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~jfleming

Chris Kirby

UNC Charlotte - Belk College of Business ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Barbara Ostdiek

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713-348-5384 (Phone)
713-348-5251 (Fax)

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