Volatility and returns: Evidence from China†

Yeguang Chi, Xiao Qiao, Sibo Yan and Binbin Deng
Authors registered in the RePEc Author Service: 邓彬斌

International Review of Finance, 2021, vol. 21, issue 4, 1441-1463

Abstract: Size, value, and momentum factors and industry portfolios in the Chinese A‐share stock market tend to have higher returns in the months following high volatility. Due to this positive relationship between lagged volatility and returns, volatility‐managed portfolios of Moreira and Muir (Volatility‐managed portfolios. Journal of Finance, 72, 1611–1644), which reduce portfolio exposure when volatility is high, are spanned by the original portfolios and do not improve the investor's opportunity set. Volatility‐scaled portfolios, which increase portfolio exposure in volatile times, are not spanned by the original portfolios and expand the investor's opportunity set. The investor's mean–variance frontier shifts into more desirable regions when volatility‐scaled portfolios are included.

Date: 2021
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