Scribd
Upload
21 views

Slides Script

Uploaded by

Wiam Qadouri
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
21 views

Slides Script

Uploaded by

Wiam Qadouri
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

Slide 4

Moreira & Muir construct the volatility managed portfolios.


The idea is that we're taking the well-known aggregate asset pricing factors and scale them by a
measure of volatility. That’s the essence of volatility managed portfolios.
Therefore, These portfolios are going to take more risk when volatility is low, and take less risk when
volatility is high.

The motivation for this paper is straight out of the most simple portfolio choice problem that if you
can basically predict the risk return trade off, then you should on these aggregate portfolio when this
risk return trade-off is more attractive.
As it's well-known, there's a very weak relationship between expected return and volatility in the time
series.
It's almost like the most has to be that volatility timing is beneficial.

Slide 6:

The paper uses the Most simple data, daily one for volatility with the most simple factors related
to the market, value, momentum, profitability, return on equity, and investment factors in
equities, as well as the currency carry trade. and ofc all annualized

key constraint: daily one data for vol

Slide 7:

The key idea is to get these well-known aggregate asset pricing factors and construct the measure of
previous monthly realized volatility using past daily data the only thing is that we use this C here to
basically normalize the volatility of these two portfolio. But this doesnt have any effect on sharpe ratio
it’s just to have alphas interpretable
and then the second step is to do the standard regression
to look at the alphas that is how much a higher SR can we get by engaging this timing strategy

Slide 9:Matrix presentation

​ Models of volatility prediction:


● The paper primarily employs Vector Autoregression (VAR) models for volatility
prediction. VAR models capture the interdependencies among different variables over
time, making them suitable for forecasting volatility.
​ Risk models for different asset classes:
● The risk models used in the Volatility Managed Portfolios are likely tailored to each
asset class's specific characteristics. These models help in assessing and managing
risks associated with diverse assets, ensuring a balanced risk exposure.
​ Strategies for reducing turnover & transaction costs:
● The paper critiques the Volatility Managed Portfolios model, suggesting that
transaction costs can erode the gains. However, specific strategies employed to
address this issue are not explicitly mentioned. Further analysis may be required to
identify potential strategies for minimizing turnover and transaction costs.

NEW à lire de la slide ++

​
Slide 11 : volatility timing result
We can see the result, we sort months by realized vol and bucket them in 5 bins and then we look next
months what happens with volatility and returns.
we see that the relationship is basically flat on returns not surprising, but predicts volatility well. So it
important to see the risk return tradeoff when deciding on investment strategies.
Average return per unit of variance represents the optimal risk exposure of a mean-variance
investor in partial equilibrium, and also represents "effective risk-aversion" from a general
equilibrium perspective.
slide 12: Implications of profitability of volatility-timing strategies
1 Portfolio choice for long term investors (Large wealth gains for both short and long-term oriented
investors)
2 Reduced-form pricing (Risk-adjust mutual fund/ hedge fund strategies )
3 General-equilibrium asset pricing models ( Puzzle: the price of risk is low when volatility is high)

Slide 13:
The finding of Moreira and Muir (2017) has been criticized
1. Out of sample I Cederburg, O’Doherty, Wang, and Yan (2020) show gains from volatility timing
cannot be realized out of sample.
2. Transaction costs I Barroso and Detzel (2021) show that transaction costs entirely erode the gains.
3. Sentiment I Barroso and Detzel (2021) also show that gains from volatility timing the market
portfolio achieved only during periods of “high sentiment.

- Overall, Criticisms in the paper focus on the issue of transaction costs eroding gains. It
suggests that the gains achieved through volatility targeting might be compromised by the
associated transaction costs, raising questions about the overall performance and
cost-effectiveness of the strategy.
- Our strategy survives these costs but can be further improved, just by for example,
if you use a model of expected volatility, you can reduce this churn substantially.

Slide 14: Dynamics of risk return tradeoff

Finally we are currently still analyzing the dynamics of risk return tradeoff, so for this we need to do a
vector auto regression to see how they interact !
Looking at the first picture
This is basically a construction, that's like how volatility to respond to a volatility shock.

Expected returns on the other hand, initially do not respond, and then it slowly respond and stay high
for a while.

That shouldn't be surprising. We know the expected return shocks


are very, very persistent. But what this is telling you is that basically you can cash out when
there is a volatility shock and come back in, and expect returns is still be very high.

There's a mismatch between risk and compensation for risk in the time series.
Why is that? Maybe some people are slow-moving.
slide 15 Conclusion:

Today we can say from our understanding that The volatility-managed portfolio (VMP) offers an
appealing market-timing strategy (Moreira and Muir, Journal of Finance, 2017). Unfortunately, an
important theoretical result for VMP and the foundation of the paper’s empirical study, namely the
arbitrariness of the constant c in the portfolio weight factor, seem questionable. so we will dig more
into the subject and finish with precise conclusions on the topic

You might also like