A Different Perspective On Volatility? An Empirical Analysis of the Effects of Volatility-Management in a Norwegian Conte.at
Abstract
To raise awareness of volatility-management - that is, improving portfolio performance
by adjusting exposure according to volatility information, this thesis aims to provide
empirical evidence on the effects of volatility-management in a Norwegian context. We find
that volatility-managed multifactor portfolios that are rebalanced monthly outperform its
nonmanaged counterparts. Specifically, our strategy generates an annualized alpha of
up to 5.56% and an appraisal ratio of 0.72 before transaction costs. In economic terms,
this implies that an investor who manages volatility increases the Sharpe ratio by 0.72
annually compared to an investor who ignores volatility timing. We also find that the
benefits are not limited to short-term investors, but remain modest at a rebalancing
frequency of up to 12 months. These results may originate from some investors reacting
slowly to changes in market volatility, which leads to an unfavorable risk-return trade-off.
Our results suggest that participants investing in the Norwegian market may capitalize
on prior volatility information, which challenges the weak form of the efficient market
hypothesis. This provides an incentive to pay attention to volatility fluctuations.