Conditional Volatility Targeting
2020
In analyzing the performance of
volatility-targeting strategies, we
found that conventional volatility
targeting fails to consistently improve
performance in global equity markets
and can lead to markedly greater
drawdowns. Motivated by return
patterns in various volatility states,
we propose a strategy of conditional
volatility targeting that adjusts
risk exposures only in the extremes
during high- and low-volatility
states. This strategy consistently
enhances Sharpe ratios and reduces
drawdowns and tail risks, with low
turnover and leverage, when used
in the major equity markets and for
momentum factors across regions.
Conditional volatility management
can also be applied to tactical
allocations among multiple assets
or risk factors.
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