The impact of volatility scaling on factor portfolio performance and factor timing

Federico Calogero Nucera and Björn Uhl
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Björn Uhl: Pinechip Capital GmbH

Journal of Asset Management, 2022, vol. 23, issue 6, No 5, 522-533

Abstract: Abstract This paper investigates the effects of volatility scaling on factor portfolio performance and factor timing. We focus on the four equity factors analyzed by Carhart (1997) and find that volatility scaling may lead to higher diversification benefits for a long-horizon investor when equity factors are combined into a portfolio. Depending on the portfolio formation methodology, we also discover a substantial time-variation in portfolio performance. In addition, our results show that volatility scaling improves factor return predictability, but this does not necessarily translate into a profitable factor rotation strategy.

Keywords: Volatility scaling; Equity factors; Portfolio formation; Diversification benefits; Factor timing (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1057/s41260-022-00279-9

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