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2021-11-11

Volatility Targeting Its Complicated

This article examines whether volatility targeting can improve returns, decrease tail loss, and deliver a more stable risk profile for risk assets using the example of US equities. The author identifies biases in the methodology used to assess the viability of the strategy in several recently published studies on the subject. After correcting for these biases, he finds that the volatility-targeting strategy results in a more stable risk profile and delivers marginally better returns but fails to reduce tail loss. Furthermore, the author shows that a better volatility-forecasting model could significantly improve returns but not tail loss.

Author - George Mylnikov
Journal - Journal of Portfolio Management

Source - https://jpm.pm-research.com/content/47/8/57