Equity Investing with Targeted Constant Volatility Exposure

45 Pages Posted: 5 Jun 2015 Last revised: 2 Feb 2017

See all articles by Nicolas A. Papageorgiou

Nicolas A. Papageorgiou

HEC Montreal - Department of Finance

Jonathan J. Reeves

UNSW Business School, University of New South Wales; Financial Research Network (FIRN)

Michael Sherris

UNSW Business School

Date Written: January 1, 2017

Abstract

Motivated by empirical evidence of the asymmetry in the relationship between equity market return and volatility, where returns and conditional volatility are negatively correlated, we develop an approach that targets constant volatility in equity market portfolios. This volatility timing strategy is univariate, which contrasts with most of the existing approaches in the literature that are multivariate and more complex. Substantial risk adjusted outperformance relative to stock market index benchmarks, after transaction costs, is demonstrated. Additional important features of these targeted constant volatility portfolios are their reduced exposure to stock market crashes and their low transaction costs relative to other approaches.

Keywords: GARCH, Outliers, Portfolio management, Volatility forecasting, Volatility timing

JEL Classification: C52, C53, G17

Suggested Citation

Papageorgiou, Nicolas A. and Reeves, Jonathan J. and Sherris, Michael, Equity Investing with Targeted Constant Volatility Exposure (January 1, 2017). FIRN Research Paper No. 2614828, UNSW Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=2614828 or http://dx.doi.org/10.2139/ssrn.2614828

Nicolas A. Papageorgiou

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Jonathan J. Reeves (Contact Author)

UNSW Business School, University of New South Wales ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Michael Sherris

UNSW Business School ( email )

Sydney, NSW 2052
Australia

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