The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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A Multifactor Perspective on Volatility‐Managed Portfolios
Published: 10/27/2024 | DOI: 10.1111/jofi.13395
VICTOR DeMIGUEL, ALBERTO MARTÍN‐UTRERA, RAMAN UPPAL
Moreira and Muir question the existence of a strong risk‐return trade‐off by showing that investors can improve performance by reducing exposure to risk factors when their volatility is high. However, Cederburg et al. show that these strategies fail out‐of‐sample, and Barroso and Detzel show they do not survive transaction costs. We propose a conditional multifactor portfolio that outperforms its unconditional counterpart even out‐of‐sample and net of costs. Moreover, we show that factor risk prices generally decrease with market volatility. Our results demonstrate that the breakdown of the risk‐return trade‐off is more puzzling than previously thought.