NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Volatility Managed Portfolios

Alan Moreira, Tyler Muir

NBER Working Paper No. 22208
Issued in April 2016, Revised in June 2016
NBER Program(s):Asset Pricing

Managed portfolios that take less risk when volatility is high produce large alphas, substantially increase factor Sharpe ratios, and produce large utility gains for mean-variance investors. We document this for the market, value, momentum, profitability, return on equity, and investment factors in equities, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in factor volatilities are not offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions and crises yet still earns high average returns. This rules out typical risk-based explanations and is a challenge to structural models of time-varying expected returns.

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Document Object Identifier (DOI): 10.3386/w22208

Published: ALAN MOREIRA & TYLER MUIR, 2017. "Volatility-Managed Portfolios," The Journal of Finance, vol 72(4), pages 1611-1644.

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