Factor portfolio and target volatility management: An analysis of portfolio performance in the U.S. and China

Haifang Xiong, Gaofei Yang and Zhiqiang Wang

International Review of Economics & Finance, 2022, vol. 79, issue C, 493-517

Abstract: Based on factor portfolios, we analyze the crash risk of factors in the Chinese stock market and compare them with those in the U.S. stock market. We construct three target volatility strategies to analyze which strategy can significantly improve the returns and Sharpe ratios of factor portfolios. We find that the dynamic target volatility strategy based on factor volatility can improve the performance of most factor portfolios in the U.S. stock market. In the Chinese A-share market, market realized volatility can predict the return of most factor portfolios. The dynamic stop strategy that takes the realized volatility of the market as the target volatility, can significantly improve performance of strategy. This paper complements evidence that dynamic target volatility strategy is the better method to manage crash risk and market realized volatility is more important in China.

Keywords: Crash risk; Target volatility; Realized volatility; Performance analysis (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:79:y:2022:i:c:p:493-517

DOI: 10.1016/j.iref.2022.02.011

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