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Downside risk and the performance of volatility-managed portfolios

Feifei Wang and Xuemin Sterling Yan

Journal of Banking & Finance, 2021, vol. 131, issue C

Abstract: Recent studies find mixed evidence on the performance of volatility-managed portfolios. We show that strategies scaled by downside volatility exhibit significantly better performance than strategies scaled by total volatility. The improved performance is evident in spanning regressions, direct Sharpe-ratio comparisons, and real-time trading strategies. A decomposition analysis indicates that the enhanced performance of downside volatility-managed portfolios is primarily due to return timing, i.e., downside volatility negatively predicts future returns. We find that employing fixed-weight strategies significantly improves the performance of volatility-managed portfolios for real-time investors. Our results hold for nine equity factors and a broad sample of 94 anomaly portfolios.

Keywords: Volatility-managed portfolio; Downside volatility; Return timing; Real-time performance (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jbankfin.2021.106198

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