Equity Investing with Targeted Constant Volatility Exposure
45 Pages Posted: 5 Jun 2015 Last revised: 2 Feb 2017
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: Suggested Citation