Conference on New Developments in Long-Term Asset Management
Monika Piazzesi and Luis Viceira, Organizers
May 19-20, 2016
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Managed portfolios that take less risk when volatility is high produce large risk-adjusted returns ("alphas") and substantially increase the ratio of expected excess return to risk (the Sharpe ratio) because changes in factor volatilities are not offset by proportional changes in expected returns. This translates into large potential utility gains for mean-variance investors. Alan Moreira and Tyler Muir document these findings for the market, value, momentum, profitability, return on equity, and investment factors in equities, as well as for the currency carry trade. The volatility-managed strategy they consider is contrary to conventional wisdom because it takes relatively less risk in recessions and crises yet still earns high average returns.
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An Equilibrium Model of Institutional Demand
The Effect of Passive Investors on Activism
Family Descent as a Signal of Managerial Quality
Risk and Return in Segmented Markets
Securities Lending as Wholesale Funding
Liquidity Transformation in Asset Management
The pattern of volatility and returns that they observe presents a challenge to research that seeks to explain the dynamics of risk premia using representative agent models. In contrast to the prediction of most standard models, their results suggest that investors' willingness to take stock market risk must be higher in periods of high stock market volatility. Sharpening the puzzle is the fact that volatility is typically high during recessions, financial crises, and in the aftermath of market crashes, when theory generally suggests investors should, if anything, be more risk averse relative to normal times.