Managing volatility: an empirical analysis of the time-series relation between risk and return Norwegian evidence

Abstract

In this paper, we examine the time-series relation between risk and return. We replicate the methodology of Moreira and Muir (2016a) and construct volatility managed portfolios that decrease the risk exposure when volatility is high, and vice versa. We implement the strategy on well-known risk factors in Norway and the UK, in addition to industry portfolios in Norway and in the U.S. The strategy in general produces large alphas and increased Sharpe ratios and the results are robust when controlling for exposure to other risk factors. We further show that using forecasted variance from sophisticated forecasting models rather than realized variance can improve the results of the volatility managed portfolios.