Journal of Banking & Finance Vol. 131 2021
Downside risk and the performance of volatility-managed portfolios
Abstract
Recent studies find mixed evidence on the performance of volatility-managed portfolios. We show that strategies scaled by downside volatility exhibit significantly better performance than strategies scaled by total volatility. The improved performance is evident in spanning regressions, direct Sharpe-ratio comparisons, and real-time trading strategies. A decomposition analysis indicates that the enhanced performance of downside volatility-managed portfolios is primarily due to return timing, i.e., downside volatility negatively predicts future returns. We find that employing fixed-weight strategies significantly improves the performance of volatility-managed portfolios for real-time investors. Our results hold for nine equity factors and a broad sample of 94 anomaly portfolios.
- DOI
- 10.1016/j.jbankfin.2021.106198
- Volume
- 131
- Pages
- 106198
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib