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Multi-Asset Volatility Premiums or Anomalies?

Brian Jacobsen, Eddie Cheng and Wai Lee
The Journal of Portfolio Management Multi-Asset Special Issue 2019, 45 (2) 47-57; DOI: https://doi.org/10.3905/jpm.2018.45.2.047
Brian Jacobsen
is the senior investment strategist on the Multi-Asset Solutions team at Wells Fargo Asset Management in Menomonee Falls, WI
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Eddie Cheng
is head of international portfolio management on the Multi-Asset Solutions team at Wells Fargo Asset Management in London, UK
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Wai Lee
is global head of research on the Multi-Asset Solutions team at Wells Fargo Asset Management in New York, NY
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Abstract

Investors demand excess returns for assuming risk, but across many asset classes, there is mixed evidence that more volatile assets realize higher returns than do assets with lower volatility. This is the volatility anomaly. By analyzing equities, fixed income, foreign exchange, and commodities, the authors show which asset classes have volatility premiums and which have volatility anomalies. For those with volatility anomalies, they provide evidence that the anomaly may be well explained by either a time-varying volatility premium or by a premium for higher-order moments such as skew or kurtosis. The authors also show that across asset classes, a skew premium diversifies other well-known premiums. From a portfolio management perspective, this means that harvesting higher-order moment premiums can improve risk-adjusted returns in multi-asset portfolios. Their research also shows that the frequency of the signal matters for its efficacy. For volatility and skew, monthly signals may be less valuable than annual signals.

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The Journal of Portfolio Management: 45 (2)
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Multi-Asset Special Issue 2019
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Multi-Asset Volatility Premiums or Anomalies?
Brian Jacobsen, Eddie Cheng, Wai Lee
The Journal of Portfolio Management Dec 2018, 45 (2) 47-57; DOI: 10.3905/jpm.2018.45.2.047

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Multi-Asset Volatility Premiums or Anomalies?
Brian Jacobsen, Eddie Cheng, Wai Lee
The Journal of Portfolio Management Dec 2018, 45 (2) 47-57; DOI: 10.3905/jpm.2018.45.2.047
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  • Article
    • Abstract
    • HIGH-VOLATILITY OR LOW-SKEWNESS PREMIUMS
    • REDUNDANCY TESTS
    • THE VALUE OF SIGNAL FREQUENCY AND HOLDING PERIOD
    • CONCLUSION
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