Type of Publication: Working paper

On the performance of volatility-managed equity factors - international and further evidence

Author(s):

Schwarz, Patrick

Publication Date:

2021

Keywords:

Volatility-managed portfolio; Transaction costs; Factor timing; Culture; International stock markets

Additional Content:

Online Appendix

Link to complete version:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3951115

Talk associated with this publication:

28th Annual Meeting of the German Finance Association (DGF)

Citation:

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Abstract

Abstract

Motivated by the mixed evidence on the performance of (downside) volatility-managed equity factor portfolios in the U.S., I study the performance of nine (downside) volatility-managed equity factors before and after considering transaction costs in a set of 45 international equity markets. My results suggest that volatility management is most promising for market, value, profitability, and momentum portfolios and that the performance can be enhanced by applying downside volatility instead of total volatility (variance) as a scaling factor. Nevertheless, a marginal trader would find it difficult to profit from these strategies as only the managed market and momentum strategies are partially robust to my transaction cost estimations. Collectively, my results suggest that the persistence of abnormal returns of (downside) volatility-managed equity factors can largely be explained by the associated transaction costs. Finally, my cross-country analysis suggests that the slow trading hypothesis is partially able to explain cross-country performance differences of volatility-managed value and momentum portfolios.