Volatility-managed portfolios in the Chinese equity market

Abstract

This paper examines the effectiveness of the volatility-timing strategy in the Chinese equity market. We find that the volatility-managed portfolio (VMP) consistently outperforms its original counterpart. This outperformance is primarily driven by stocks with high arbitrage risks, and is further enhanced when considering the price-limit rule in China. The conditional systematic risks of volatility-managed portfolios are significantly lower during market downturns, serving as a hedge against high volatility. Additionally, the multi-factor portfolio constructed from the individual volatility-managed factors outperforms other multi-factor portfolios, especially during periods of heightened investor sentiment or diminished macroeconomic confidence.