The disappearing profitability of volatility-managed equity factors

Timotheos Angelidis and Nikolaos Tessaromatis

Journal of Financial Markets, 2023, vol. 65, issue C

Abstract: Our evidence suggests that the profitability of volatility timing strategies applied to equity factor portfolios disappeared when changes in the trading and information environment in the U.S. in the early 2000s made arbitrage less costly. The reduction of volatility timing alphas is greater for factor portfolios based on small-capitalization stocks, which are less liquid, more costly to trade, and more expensive to short than portfolios based on large-capitalization stocks. The evidence holds for 11 factor portfolios and a broader sample of 110 anomaly portfolios in the U.S. Our research highlights the importance of frictions in the profitability of investment strategies.

Keywords: Volatility-managed; Equity factors; Small-capitalization; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:65:y:2023:i:c:s1386418123000551

DOI: 10.1016/j.finmar.2023.100857

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