On the performance of volatility-managed portfolios

Scott Cederburg, Michael S. O'Doherty, Feifei Wang, Xuemin (Sterling) Yan

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

Using a comprehensive set of 103 equity strategies, we analyze the value of volatility-managed portfolios for real-time investors. Volatility-managed portfolios do not systematically outperform their corresponding unmanaged portfolios in direct comparisons. Consistent with Moreira and Muir (2017), volatility-managed portfolios tend to exhibit significantly positive alphas in spanning regressions. However, the trading strategies implied by these regressions are not implementable in real time, and reasonable out-of-sample versions generally earn lower certainty equivalent returns and Sharpe ratios than do simple investments in the original, unmanaged portfolios. This poor out-of-sample performance for volatility-managed portfolios stems primarily from structural instability in the underlying spanning regressions.

Original languageEnglish (US)
Pages (from-to)95-117
Number of pages23
JournalJournal of Financial Economics
Volume138
Issue number1
DOIs
StatePublished - Oct 2020

Keywords

  • Portfolio choice
  • Volatility-managed portfolios

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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