Volatility Timing under Low-Volatility Strategy

19 Pages Posted: 24 Aug 2019 Last revised: 7 Jul 2020

See all articles by Poh Ling Neo

Poh Ling Neo

Singapore University of Social Sciences

Chyng Wen Tee

Singapore Management University - Lee Kong Chian School of Business

Date Written: August 15, 2019

Abstract

We show that the slope of the volatility decile portfolio's return profile contains valuable information that can be used to time volatility under different market conditions. During good (bad) market condition, the high- (low-) volatility portfolio produces the highest return. We proceed to devise a volatility timing strategy based on statistical tests on the slope of the volatility decile portfolio's return profile. Volatility timing is achieved by being aggressive during strong growth periods, while being conservative during market downturns. Superior performance is obtained, with an additional return of 4.1% observed in the volatility timing strategy, resulting in a five-fold improvement on accumulated wealth, along with statistically significant improvement in the Sortini ratio and the Information ratio. The authors also demonstrate that stocks in the high-volatility portfolio are more strongly correlated compared to stocks in the low-volatility portfolio. Hence the profitability of the volatility timing strategy can be attributed to successfully holding a diversified portfolio during bear markets, while holding a concentrated growth portfolio during bull markets.

Keywords: portfolio management, asset allocation, low volatility strategies

JEL Classification: G11

Suggested Citation

Neo, Poh Ling and Tee, Chyng Wen, Volatility Timing under Low-Volatility Strategy (August 15, 2019). Available at SSRN: https://ssrn.com/abstract=3441508 or http://dx.doi.org/10.2139/ssrn.3441508

Poh Ling Neo

Singapore University of Social Sciences ( email )

461 Clementi Road
599491
Singapore

Chyng Wen Tee (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore

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