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The impact of volatility scaling on factor portfolio performance and factor timing

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This paper investigates the effects of volatility scaling on factor portfolio performance and factor timing. We focus on the four equity factors analyzed by Carhart (1997) and find that volatility scaling may lead to higher diversification benefits for a long-horizon investor when equity factors are combined into a portfolio. Depending on the portfolio formation methodology, we also discover a substantial time-variation in portfolio performance. In addition, our results show that volatility scaling improves factor return predictability, but this does not necessarily translate into a profitable factor rotation strategy.

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  1. In the following parts of the paper, we use interchangeably the terms volatility-managed factors and risk-adjusted factors.

  2. As a robustness check, we also control for transaction costs and find that they do not affect the main findings of our paper. This further evidence is available upon request.

  3. These funds are typically called style premia or alternative risk premia funds and in addition to equity factors may also trade these factors on other asset classes.


  5. The returns associated with these portfolios are also available on Professor K. French website.

  6. We use bold-face characters for vector and matrices while non-bold-face letters for scalars.

  7. This result is consistent with Harvey et al. (2018) as they also show that volatility scaling improves downside measures of risk.

  8. The lookback of one year is justified for example by the analysis of Moskowitz et al. (2012).


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The authors declare that they have not received any funding for the paper.

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Correspondence to Federico Nucera.

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The views expressed in this paper are exclusively the views of the authors and do not necessarily reflect the views of Bank of Italy or Pinechip Capital GmbH, their affiliates, or their employees. This paper was written when Federico Nucera was a researcher at LUISS University. It does not contain any investment advice. No responsibility is taken by the authors for any investment based on the results of this article. All remaining errors are our own.

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Nucera, F., Uhl, B. The impact of volatility scaling on factor portfolio performance and factor timing. J Asset Manag 23, 522–533 (2022).

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