Testing of a Volatility-Based Trading Strategy Using Behavioral Modified Asset Allocation

Jonas Freibauer and Silja Grawert ()
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Jonas Freibauer: Faculty of Computer Science and Mathematics, Munich University of Applied Sciences HM, 80335 Munich, Germany
Silja Grawert: Faculty of Computer Science and Mathematics, Munich University of Applied Sciences HM, 80335 Munich, Germany

JRFM, 2022, vol. 15, issue 10, 1-20

Abstract: The performance of volatility-based trading strategies depends, among other factors, on the asset selection and the associated risk preference. For this study, we conducted a representative survey for Germany to determine the asset preferences of individuals with lower-risk and higher-risk preference. These two types of behavioral modified asset allocations (lower-risk and higher-risk) form the basis for testing our volatility-based trading strategy with different risk and loss levels. The tests are based on historical asset price data over a period of nearly the last eleven years. The goal was to historically outperform the broad market by changing various factors, such as the initial asset allocation, the asset reallocation, and the risk and loss level underlying the trading strategy. We achieve this by using the riskier initial asset allocation and applying our trading strategy with a risk and loss level of 10% each. In this case, a historical return of 326% could have been achieved with our trading strategy over the period under review.

Keywords: volatility-based trading strategy; behavioral portfolio; risk behavior; copula construction; behavioral asset allocation (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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