Conditional Volatility Targeting

Financial Analysts Journal, 2020, 76(4): 54–71

32 Pages Posted: 20 Jul 2020 Last revised: 9 Nov 2020

See all articles by Dion Bongaerts

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance

Xiaowei Kang

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Date Written: June 17, 2020

Abstract

We analyze the performance of volatility targeting strategies. Conventional volatility targeting fails to consistently improve performance in global equity markets and can lead to markedly greater draw-downs. Motivated by return patterns in different volatility states, we propose a conditional volatility targeting strategy that only adjusts risk exposures in the extremes during high and low volatility states. This strategy consistently enhances Sharpe ratios and reduces draw-downs and tail risks for major equity markets and momentum factors across regions, with low turnover and leverage. Conditional volatility management can also be applied to tactical allocation between multiple assets or risk factors.

Suggested Citation

Bongaerts, Dion and Kang, Xiaowei and Van Dijk, Mathijs A., Conditional Volatility Targeting (June 17, 2020). Financial Analysts Journal, 2020, 76(4): 54–71, Available at SSRN: https://ssrn.com/abstract=3636727 or http://dx.doi.org/10.2139/ssrn.3636727

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands
+31 (0) 10 40 82 790 (Phone)
+31 (0) 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/portal/page/portal/home/faculty/academic_departments/finance/faculty_and_staff/fac

Xiaowei Kang (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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