Volatility scaling applied to investment-grade bond portfolios

Abstract

Scaling excess returns in investment-grade bond portfolios by their past volatility does not increase risk-adjusted returns nor Sharpe Ratios, even considering longer or shorter periods with different degrees of volatility. This is observed for the United States bond market in USdollars. I would expect that volatility scaling could increase alphas for the lowest rated bond portfolios of my sample, that theoretically incorporate a higher degree of equity features, BAAbond portfolios, but that was not the case. When I isolate the credit or default risk from the expected returns, I also verify the inexistence of volatility management risk-adjusted returns. Major institutional holdings, buy and hold strategies typical of bondholders, mean reversion of returns for long-term investments, liquidity constraints, regulatory procedures, transaction costs, all can be reasons why the volatility scaling strategies are not worthwhile.

Date of Award	30 Jun 2022
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Pedro Barroso (Supervisor)