Forecasting skill and volatility timing performance

33 Pages Posted: 24 Nov 2020 Last revised: 11 Mar 2021

See all articles by Nicholas Taylor

Nicholas Taylor

University of Bristol - School of Economics, Finance and Management

Date Written: October 3, 2020

Abstract

The exact conditions under which volatility timing strategies yield value are documented. These conditions include: the ability to correctly forecast next period stochastic variance, and violation of Merton's ICAPM. Using reasonable parameter values plugged into the derived formulae, the results show that extreme leverage is often required for success. A method of tempering leverage is proposed, which is somewhat able to loosen the requirement of high leverage while still maintaining a good performance level.

Keywords: Volatility timing, forecasting skill, risk preference, performance fees.

JEL Classification: C22, C58, G11, G17

Suggested Citation

Taylor, Nicholas, Forecasting skill and volatility timing performance (October 3, 2020). Available at SSRN: https://ssrn.com/abstract=3704260 or http://dx.doi.org/10.2139/ssrn.3704260

Nicholas Taylor (Contact Author)

University of Bristol - School of Economics, Finance and Management ( email )

United Kingdom

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