How to I calculate the value of c in the vol-managed equation specified by Moreira & Muir Volatilty Managed Portfolios (2016) Equation 1?

Portfolio return in month t+1 =$$\frac{c}{RV_t^2}f_{t+1}$$

where $RV^2_t$ is the Realized variance over the past month , $f_{t+1}$ is the factor return in the next month.

  • $\begingroup$ Possible duplicate of Implementing Volatility Managed Strategies $\endgroup$ – skoestlmeier Dec 8 '18 at 15:45
  • 1
    $\begingroup$ Could you please add some more information here? "C" of some 2 author paper that it not linked ... hard to follow this question .. $\endgroup$ – Richard Dec 8 '18 at 19:49

Here is a simple "how to do it" answer.

Run the Volatility Managed Strategy over some historical period using an initial guess for $c$, say $c_0=0.05$. I will call this the Trial Run.

Compute the standard deviation of the strategy returns $\sigma_0$ and the standard deviation of the buy and hold returns $\sigma_{BH}$ over the same period.

Now run the Volatility Managed Strategy again over the same period but using $c=\frac{\sigma_{BH}}{\sigma_0}c_0$. This is the final run; you can check that the standard deviation of the VMS will be exactly equal to the standard deviation of buy and hold. And you are finished.


Your Answer

By clicking "Post Your Answer", you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.