Conditional Volatility Targeting

Research output: Contribution to journalArticleProfessionalpeer-review

4 Citations (Scopus)

Abstract

In analyzing the performance of volatility-targeting strategies, we found that conventional volatility targeting fails to consistently improve performance in global equity markets and can lead to markedly greater drawdowns. Motivated by return patterns in various volatility states, we propose a strategy of conditional volatility targeting that adjusts risk exposures only in the extremes during high- and low-volatility states. This strategy consistently enhances Sharpe ratios and reduces drawdowns and tail risks, with low turnover and leverage, when used in the major equity markets and for momentum factors across regions. Conditional volatility management can also be applied to tactical allocations among multiple assets or risk factors.
Original languageEnglish
Pages (from-to)54-71
Number of pages18
JournalFinancial Analysts Journal
Volume76
Issue number4
Early online date4 Sep 2020
DOIs
Publication statusPublished - 2020

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