RT Journal Article
SR Electronic
T1 Volatility Weighting over Time in the Presence of Transaction Costs
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 33
OP 45
DO 10.3905/jwm.2019.21.4.033
VO 21
IS 4
A1 Valeriy Zakamulin
YR 2019
UL https://pm-research.com/content/21/4/33.abstract
AB Numerous empirical studies demonstrate the superiority of dynamic strategies with a volatility-weighting-over-time mechanism. These strategies control the portfolio risk over time by adjusting the risk exposure according to updated volatility forecasts. Yet, to reap all the benefits promised by volatility weighting over time, the composition of the active portfolio must be revised rather frequently. Transaction costs represent a serious obstacle to benefiting from this dynamic risk control technique. In this article, we propose a modified volatility-weighting strategy that allows one to reduce dramatically the amount of trading costs. The empirical evidence shows that the advantages of the modified volatility-weighting strategy persist even in the presence of high transaction costs.TOPICS: Portfolio construction, analysis of individual factors/risk premia, risk management