Does Volatility Timing Enhance Portfolio Performance?

Abstract

In this paper, we replicate the methodology of Moreira and Muir’s “Volatility-Managed Portfolios” (2017). We investigate whether it is possible to benefit from volatility timing in smaller equity markets by testing the strategy on systematic risk factors in Norway. The strategy is constructed by scaling monthly returns by the inverse of their previous month’s realized variance. We find that the strategy only performs well in unrealistic trading environments where all costs and restraints associated with transactions are non-existent.