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Is Volatility Targeting an Effective Strategy? Evidence from Selected Asian Equity Markets

  • Zouari Hammadi Assistant professor of finance at the High Institute of Management of Gabes, Tunisia
Motivated by the mixed findings of the existing literature, we investigate the performance of the volatility targeting strategy in four Asian equity markets based on a block-bootstrap simulation. We found no clear evidence of outperformance of the strategy against a 50/50 constant-mix portfolio, except in the Chinese market where volatility and tail risk are highest. The lack in performance has been attributed to an inability to detect the negative relationship between volatility and returns by all of the volatility forecasting models we consider. This may affect the capacity to reduce downside risk and tail risk but consistently causes a substantial drag on performance. Owing to forecasting errors, the strategy appears to perform considerably better and easier to implement in practice when using a model with low sensitivity to volatility changes along with a rebalancing buffer.

  • Zouari Hammadi
Motivated by the mixed findings of the existing literature, we investigate the performance of the volatility targeting strategy in four Asian equity markets based on a block-bootstrap simulation. We found no clear evidence of outperformance of the strategy against a 50/50 constant-mix portfolio, except in the Chinese market where volatility and tail risk are highest. The lack in performance has been attributed to an inability to detect the negative relationship between volatility and returns by all of the volatility forecasting models we consider. This may affect the capacity to reduce downside risk and tail risk but consistently causes a substantial drag on performance. Owing to forecasting errors, the strategy appears to perform considerably better and easier to implement in practice when using a model with low sensitivity to volatility changes along with a rebalancing buffer.
Volatility targeting,Realized volatility,Block-bootstrap simulation,Downside risk,Performance evaluation