The Volatility Managed Portfolios Based On The Fama-French Five-Factor Model

The discussions about the relationship of risk and return are very popular in financial history.Traditional theories have always believed that the greater risk brings greater return,and recently,there have been scholars who have questioned the traditional views and even held the opposite argument.Based on the non-positive correlation between risk and return,Moreira and Muir(2017)proposed a volatility management strategy to reduce risk exposure when volatility is high and vice visa.The strategy has achieved good results in the US,UK and Norway markets.This paper attempts to implement the volatility management strategy based on the FF five factors to test its effectiveness in the A-share market.First,we test the explanatory power of the FF five-factor model in the A-share market by means of GRS test,grouped time series regression and constructing quantitative portfolios.The empirical results show that from the perspective of specific factors,MKT?SMB ?HML and RMW have strong explanatory power,and CMA have a general explanatory power.From the explanatory power of the model,the five-factor model has a weak explanatory power for the excess return of the A-share portfolio,and is even worse than the three-factor model.Secondly,we construct a volatility management portfolio in a single factor and multi-factor environment to test whether volatility management has an optimization effect on the FF five factors.From the time series regression results of single factor and improvement factor,the market factor,scale factor,profit factor and investment factor are managed to generate alpha income after the reason,but the result is not significant,but the value factor is not as effective after management.The reason.From the results of quantitative strategy optimization,the volatility management strategy has an annualized yield of more than 2.4%,the alpha income exceeds 1.5%,the reduction is 10%,theSharpe ratio is increased by 6%,and the information ratio is increased.10%,the maximum retracement was reduced by 5%.Regardless of the risk and return indicators,it is better than the original strategy,but the improvement effect is limited.Since then,we have carried out related expansion tests,and the empirical results also support this conclusion.Therefore,we believe that the volatility management strategy is not very applicable in A-shares.Finally,we try to explain our empirical results from the experience level.The A-shares are very prominent due to the specific “shell pollution” problem.Most of the excess returns in the market come from small-cap stocks.The volatility of small-cap stocks is large,and the volatility management will inevitably reduce the proportion of small-cap stocks,which makes it difficult to generate higher excess returns.