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Momentum with Volatility Timing: Navigating Dynamic Markets

Last Updated on 10 February, 2024 by Rejaul Karim

Navigating the evolving landscape of factor investing, “Momentum with Volatility Timing” by Yulia Malitskaia, from VKY Analytics, LLC, Université Toulouse I Capitole, and Toulouse Business School Research Centre, unfurls a dynamic strategy that bridges the gap between passive and active management.

Published on July 10, 2019, the paper responds to the surge in factor investing by introducing the volatility-timed winners approach. This innovative technique employs past volatilities as timing predictors, strategically alleviating momentum factor underperformance during market downturns and post-crisis periods. Validated through Spearman rank correlation, the approach harmonizes with various strategies, including momentum volatility scaling, risk-based asset allocation, time series momentum, and MSCI momentum indexes.

The analysis not only refines existing volatility scaling strategies but also unifies the realms of factor investing and risk-based asset allocation within the smart-beta domain. This research, navigating the intersection of factors and market dynamics, unveils a strategic synthesis poised to reshape the landscape of portfolio management.

Abstract Of Paper

The growing adoption of factor investing simultaneously prompted the active topic of factor timing approaches for the dynamic allocation of multi-factor portfolios. The trend represents a natural development of filling the gap between passive and active management. The paper addresses this direction by introducing the volatility-timed winners approach that applies past volatilities as a timing predictor to mitigate momentum factor underperformance for time intervals spanning the market downturn and post-crisis period. The proposed approach was confirmed with Spearman rank correlation and demonstrated in relation to different strategies including momentum volatility scaling, risk-based asset allocation, time series momentum and MSCI momentum indexes. The corresponding analysis generalized existing volatility scaling strategies and brought together the two branches of the smart-beta domain, factor investing and risk-based asset allocation.

Original paper – Download PDF

Here you can download the PDF and original paper of Momentum with Volatility Timing.

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Author

Yulia Malitskaia
VKY Analytics, LLC; Université Toulouse I Capitole; Toulouse Business School Research Centre

Conclusion

In summary, the exploration of Momentum with Volatility Timing introduces a novel avenue in factor investing, seamlessly bridging the gap between passive and active management. The paper presents the volatility-timed winners approach, strategically employing past volatilities as timing predictors to alleviate momentum factor underperformance, especially during periods encompassing market downturns and post-crisis phases.

This innovative approach is substantiated through Spearman rank correlation and validated across various strategies, including momentum volatility scaling, risk-based asset allocation, time series momentum, and MSCI momentum indexes.

In doing so, the study not only contributes to the evolution of factor timing methodologies but also unifies distinct realms within the smart-beta domain, harmonizing factor investing with risk-based asset allocation strategies.

Related Reading:

An Intraday Trend-Following Trading Strategy on Equity Derivatives in India

Momentum in the Indian Equity Markets: Positive Convexity and Positive Alpha

FAQ

Q1: What is the main focus of the paper “Momentum with Volatility Timing,” and how does it address the evolving landscape of factor investing?

The paper focuses on introducing a dynamic strategy called the volatility-timed winners approach in the context of factor investing. This strategy aims to bridge the gap between passive and active management by using past volatilities as timing predictors. It specifically addresses the challenge of momentum factor underperformance during market downturns and post-crisis periods, providing a nuanced solution to enhance factor investing strategies.

Q2: How does the volatility-timed winners approach work, and what problem does it aim to mitigate in the realm of factor investing?

The approach strategically uses past volatilities as timing predictors to mitigate the underperformance of the momentum factor, particularly during intervals that include market downturns and post-crisis periods. By incorporating volatility timing, the strategy seeks to enhance the performance of momentum factor portfolios and address the challenges associated with market fluctuations.

Q3: What validation methods were employed to confirm the effectiveness of the volatility-timed winners approach, and how does it relate to other strategies within the smart-beta domain?

The paper validates the proposed approach through Spearman rank correlation and assesses its effectiveness across various strategies, including momentum volatility scaling, risk-based asset allocation, time series momentum, and MSCI momentum indexes. This comprehensive analysis not only refines existing volatility scaling strategies but also unifies factor investing and risk-based asset allocation within the smart-beta domain, contributing to a more integrated and sophisticated approach to portfolio management.

You can find many more Research Papers here

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