Volatility-managed equity factors around the globe

Author(s):

Schwarz, Patrick

Name of Event:

100 Jahre VHB: Jubiläumstagung des Verbands der Hochschullehrerinnen und Hochschullehrer für Betriebswirtschaft e.V.

Location:

Düsseldorf (digital)

Date:

10.03.2022

Language:

Englisch

Keywords:

Volatility-managed portfolio; Transaction costs; Short-sale constraints; Arbitrage risk; Factor timing; Sentiment; International stock markets

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.