Volatility Managed Multi-Factor Portfolios

55 Pages Posted: 1 Mar 2024 Last revised: 29 Feb 2024

See all articles by Christoph Reschenhofer

Christoph Reschenhofer

Vienna University of Economics and Business

Josef Zechner

Vienna University of Economics and Business

Date Written: February 27, 2024

Abstract

This paper demonstrates that portfolio performance can be substantially enhanced by simultaneously utilizing the volatilities of historical factor returns and option-derived market volatilities to determine factor exposures. The extent of improvement is particularly pronounced in risk regimes exhibiting option-implied right-skewed and high volatility market returns. Further gains in risk-adjusted portfolio returns are achieved when model parameters are separately estimated for different regimes. Importantly, these results are not contingent on a specific set of factors; similar enhancements are observed when employing principal components derived from a diverse set of factors. Furthermore, the findings are robust to transaction costs and out-of-sample estimation.

Keywords: Volatility management, equity risk premia, portfolio management, investment strategies

JEL Classification: G01, G11, G12

Suggested Citation

Reschenhofer, Christoph and Zechner, Josef, Volatility Managed Multi-Factor Portfolios (February 27, 2024). Available at SSRN: https://ssrn.com/abstract=4005163 or http://dx.doi.org/10.2139/ssrn.4005163

Christoph Reschenhofer (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Josef Zechner

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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