26
Apr
On The Optimality Of Target Volatility Strategies. TVTs seek to limit portfolio volatility in order to substantially reduce the effect of markets falls. We achieve this by leveraging the portfolio at times of low volatility and scaling down at times of high volatility. A capital protection strategy on top of a target volatility strategy can help reduce the costs. A volatility targeting approach uses dynamic asset allocation to achieve a stable level of volatility in all market environments by taking advantage of the negative relationship between volatility and return as well as the persistence of volatility.
One straightforward way of protecting against volatility is to use our Target Volatility Triggers. This changes for high target volatilities. Our modeling framework uses a hierarchical Bayesian approach to weave together a multivariate nonhomogeneous hidden Markov model. According to Romain. We achieve this by leveraging the portfolio at times of low volatility and scaling down at times of high volatility. Our results apply to risky portfolios managed against a risk-free or risky benchmark therefore including alpha strategies and to volatility-targeting strategies.
Managed volatility strategies adjust asset allocation dynamically in anticipation of or in response to extreme market volatility.
Responded to this aversion to volatility by considering a number of targeted volatility strategies. Investors need to ensure target volatility and leverage. Thus we believe investors should think in terms of an allocation to volatility instead of an allocation of amounts. Target volatility with leverage constraints runs at a lower beta than buy and hold. So if 15 is the target you will adjust when your portfolio volatility goes below 12 or above 18. This ensures a more predictable and smoother development of risk making it easier for the Capital Protection strategy to manage a loss at the overall portfolio level.