Factor investing

: volatility management

Abstract

This dissertation analyzed how volatility management improves the performance of economic factors beyond the momentum factor. It was based on articles by Barroso & Santa Clara (2015) and Moreira & Muir (2017), extending the period under analysis to 2023. Additionally, two elements of robustness were added: two volatility estimation horizons (21 and 180 days) and a cross-regional analysis: US, Europe, and Developed Countries. A methodology inspired by the articles of the reference authors was developed and applied to the momentum factor and the five factors of Fama & French (2015). The results of the momentum factor reinforce the existing financial literature. In the US, there was an increase in the adjusted Sharpe Ratio of 103% (21 days) and 118% (180 days). In Europe and Developed Countries, the results were similar, showing improvements. For the remaining factors, the impact was inconsistent and heterogeneous. The profitability factor showed positive results with increases in the Sharpe Ratio in the US of 16% (21 days) and 29% (180 days). The factors, size and investment, in most analyses showed deterioration in adjusted performance, with losses in the adjusted Sharpe Ratio of 74%. The market and value factors showed mixed behavior, with occasional improvements. In summary, the results corroborate the financial literature regarding the positive effects of volatility management on the momentum factor. For the remaining factors, the effect is variable, depending on the context and nature of each factor, and it is not possible to conclude that volatility management has consistent and positive effects on these factors.

Date of Award	10 Dec 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Francisco José Guedes dos Santos (Supervisor)