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Investing when Volatility Fluctuates

By Leping Wang

Abstract

This paper points out that in the presence of realistic transaction costs, mean reversion in monthly return volatility could produce significant short-run horizon effect with stock allocations. The horizon effect is found to be state-dependent, and could be either positive or strikingly negative, depending on the current value of return volatility. This leads to a reduced sensitivity of the optimal stock allocation to current return volatility as a function of the expected portfolio holding period, which suggests that how much an investor values the knowledge of the true current volatility shock also depends on other factors such as investment horizons and transaction costs

Year: 2004
OAI identifier: oai:CiteSeerX.psu:10.1.1.196.4736
Provided by: CiteSeerX
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