The Impact of Uncertainty on Volatility-Managed Investment Strategies

Abstract

We investigate the relationship between the performance of volatility-managed investment strategies and uncertainty, both across stocks and over time. We demonstrate that volatility management yields a significantly larger improvement in risk-adjusted performance for stocks with low uncertainty compared to those with high uncertainty, and for the market portfolio, it yields better performance during periods of low aggregate uncertainty compared to periods of high uncertainty. We also show that differences in uncertainty can partially explain the differential performance of volatility management strategies across factor-sorted portfolios, and that sentiment-based explanations for the performance of volatility management depend on the level of uncertainty. Our results are robust to the use of alternative proxies for uncertainty and alternative volatility management strategies.

Keywords: Uncertainty, Asset Pricing, Stock returns, Volatility management, Sentiment

JEL Classification: G11, G12