This paper won the $10k National Association of Active Investment Managers (NAIM) award for Best Paper.
H/T Mebane Faber over at World Beta.
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By Tony Cooper
Double-Digit Numerics
Abstract
It is difficult to predict stock market returns but relatively easy to predict market volatility. But volatility predictions don’t easily translate into return predictions since the two are largely uncorrelated. We put forward a framework that produces a formula in which returns become a function of volatility and therefore become somewhat more predictable. We show that this strategy produces excess returns giving us the upside of leverage without the downside.
As a side-effect the strategy also smoothes out volatility variation over time and gives us a dynamic timing signal for tilting asset allocations between conservative and aggressive assets.
Keywords: volatility timing, volatility of volatility, extreme volatility, volatility drag, managed volatility, continuously dynamic leverage, leveraged exchange traded funds, alpha generation.
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