An Analysis of Volatility Clustering of Equity Factor Strategies
9 Pages Posted: 9 Apr 2021
Date Written: April 8, 2021
Volatility clustering is a well-known effect in equity markets. In simple meaning, volatility clustering refers to a tendency of large changes in asset prices to follow large changes and small changes in asset prices to follow small changes. We tested two hypotheses: (1) firstly, if there is a volatility clustering present in equity factor strategies, (2) secondly, whether past factor volatility predicts future factor performance. We were able to confirm the first hypothesis. However, a factor allocation trading strategy based on volatility predictability doesn’t perform well.
Keywords: factor investing, factor allocation, volatility clustering, volatility effect, equity long-short
JEL Classification: G11,
Suggested Citation: Suggested Citation