Publication Type

Journal Article

Version

submittedVersion

Publication Date

11-2021

Abstract

The authors show that the slope of the volatility decile portfolio’s return profile contains valuable information that can be used to time volatility under different market conditions in the United States. During good (bad) market conditions, the high- (low-) volatility portfolio produces the highest return. The authors proceed to devise a volatility timing strategy based on statistical tests on the slope of the volatility decile portfolio’s return profile. Volatility timing is achieved by being aggressive during strong growth periods and conservative during market downturns. Superior performance is obtained, with an additional return of 4.1% observed in the volatility timing strategy, resulting in a fivefold improvement on accumulated wealth, along with statistically significant improvement in the Sortini ratio and the information ratio. The authors also demonstrate that stocks in the high-volatility portfolio are more strongly correlated compared to stocks in the low-volatility portfolio. Hence, the profitability of the volatility timing strategy can be attributed to successfully holding a diversified portfolio during bear markets and holding a concentrated growth portfolio during bull markets.

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

Publication

Journal of Portfolio Management

First Page

1

Last Page

14

ISSN

0095-4918

Identifier

10.3905/jpm.2021.1.293

Publisher

Institutional Investor Inc

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