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Managing Portfolio Volatility

Michael Stamos and Thomas Zimmerer
The Journal of Portfolio Management Multi-Asset Special Issue 2021, jpm.2021.1.207; DOI: https://doi.org/10.3905/jpm.2021.1.207
Michael Stamos
is the director of Research-Multi Asset at Allianz Global Investors in Frankfurt, Germany
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Thomas Zimmerer
is global head of Multi Asset Investments at Allianz Global Investors in New York, NY.
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Abstract

The authors revisit asset allocation strategies that aim at actively managing the volatility of multi-asset-class portfolios in response to time-varying volatility forecasts. They use the historical data of 29 major market indexes covering global equities, bonds, currencies, and commodities and apply a common set of exponentially weighted volatility estimates to them. The authors find that active volatility management is beneficial for most of these asset classes and for mixed asset portfolios, leading to more consistent wealth accumulation over time. In cross-validations, they find that fast-moving volatility forecasts seem beneficial because they have better forecasting accuracy and produce economic gains in terms of risk accuracy and performance. The authors also find significant reduction of tail risks for most assets, except for bonds, where the reduction is minor.

TOPICS: Portfolio construction, volatility measures, risk management, tail risks, performance measurement

Key Findings

  • ▪ We find that active volatility management is beneficial for many major asset classes and for mixed asset portfolios, leading to more consistent wealth accumulation over time.

  • ▪ In cross-validations, we find that fast-moving volatility forecasts seem beneficial because they have better forecasting accuracy and produce economic gains in terms of risk accuracy and performance.

  • ▪ We also find significant reduction of tail risks for most assets, except for bonds, where the reduction is minor.

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The Journal of Portfolio Management: 49 (2)
The Journal of Portfolio Management
Vol. 49, Issue 2
Quantitative Special Issue 2023
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Managing Portfolio Volatility
Michael Stamos, Thomas Zimmerer
The Journal of Portfolio Management Jan 2021, jpm.2021.1.207; DOI: 10.3905/jpm.2021.1.207

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Managing Portfolio Volatility
Michael Stamos, Thomas Zimmerer
The Journal of Portfolio Management Jan 2021, jpm.2021.1.207; DOI: 10.3905/jpm.2021.1.207
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  • Article
    • Abstract
    • A BRIEF LOOK AT HISTORICAL VOLATILITY PATTERNS OF EQUITY MARKETS
    • FORECASTING VOLATILITY: A CROSS-ASSET PERSPECTIVE
    • MANAGING PORTFOLIO VOLATILITY AND HITTING A VOLATILITY TARGET
    • ECONOMIC GAINS MEASURED BY RISK-ADJUSTED RETURNS
    • A LOOK AT TAIL RISKS
    • CONCLUSIONS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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