Portfolio management with targeted constant market volatility

Managing equity volatility exposure is fundamental to fund managers, insurance companies and pension funds. This is especially important for product developments including target-date portfolios and variable annuities where volatility management is critical. Empirical evidence shows asymmetry betwee...

Full description

Saved in:
Bibliographic Details
Published in:Insurance, mathematics & economics mathematics & economics, 2018-11, Vol.83, p.134-147
Main Authors: Doan, Bao, Papageorgiou, Nicolas, Reeves, Jonathan J., Sherris, Michael
Format: Article
Language:English
Subjects:
Accumulation
Annuities
Defined contribution plans
Equity
Equity volatility
GARCH
Insurance companies
Investment management
Investment strategy
Management
Marketing
Markets
Pension funds
Portfolio management
Portfolios
Securities markets
Stock market crashes
Stock market indexes
Target markets
Target-date funds
Transaction costs
Volatility
Volatility forecasting
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Managing equity volatility exposure is fundamental to fund managers, insurance companies and pension funds. This is especially important for product developments including target-date portfolios and variable annuities where volatility management is critical. Empirical evidence shows asymmetry between equity market return and volatility, with returns and conditional volatility negatively correlated. We develop an approach that targets constant volatility in equity market portfolios and assess its performance with U.S., U.K., German and Australian data focusing on long term accumulation investment strategies popular with DC pension plans. Our approach to volatility management is univariate, in contrast to most of the existing approaches in the literature that are multivariate and more complex. Of particular relevance to pension funds is that we show substantial risk adjusted outperformance (in the range of an additional 100 to 350 basis points on average) relative to stock market index benchmarks, after transaction costs. Other features of the targeted constant volatility portfolios, relevant to insurers and pension funds, are a significantly reduced exposure to stock market crashes and low transaction costs relative to other approaches.
ISSN:0167-6687
1873-5959
DOI:10.1016/j.insmatheco.2018.09.010