Browsing by Author "Rebelo, Maria Alexandra da Costa Pita Martins"
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- Volatility scaling applied to investment-grade bond portfoliosPublication . Rebelo, Maria Alexandra da Costa Pita Martins; Barroso, Pedro Monteiro e SilvaScaling excess returns in investment-grade bond portfolios by their past volatility does not increase risk-adjusted returns nor Sharpe Ratios, even considering longer or shorter periods with different degrees of volatility. This is observed for the United States bond market in US dollars. I would expect that volatility scaling could increase alphas for the lowest rated bond portfolios of my sample, that theoretically incorporate a higher degree of equity features, BAA bond portfolios, but that was not the case. When I isolate the credit or default risk from the expected returns, I also verify the inexistence of volatility management risk-adjusted returns. Major institutional holdings, buy and hold strategies typical of bondholders, mean reversion of returns for long-term investments, liquidity constraints, regulatory procedures, transaction costs, all can be reasons why the volatility scaling strategies are not worthwhile.