Steadfast, Greedy, or Fearful? Strategies for Responding to Extreme Market Volatility
6 Pages Posted: 3 Jun 2020
Date Written: June 3, 2020
March 2020 packed 2 ½ years of normal U.S. stock market volatility into one month, making it the most volatile month on record. Daily variability clocked in at 6%, six times higher than the average over the past 90 years. How should an investor respond to such volatility? In this article we explore four possible approaches, two long-term and two short-term in nature. We give particular focus to Volatility Targeting and Momentum strategies, discussing the investor behavior that might make one or both of these approaches attractive as a driver of portfolio asset allocation. We discuss the similarities in the two strategies as applied to stock market scaling, and provide the results of long-term backtests. We conclude that all four approaches discussed, alone or in combination, have merits.
Keywords: market volatility, March 2020, coronavirus, COVID-19, expected returns, expected risk
JEL Classification: B12, B16, B20, C00, C10, C11, C50, C57, C73, D03, D81, D83, E00, G00, G02, G11, G12, G14, G17, G23
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