Abstract
Long-short factors and industry portfolios in the Chinese A-share stock market tend to have higher returns the months following high volatility. Due to this positive relationship between lagged volatility and returns, volatility-managed portfolios of Moreira and Muir (2017) do not work well in China - they are spanned by the original portfolios. Volatility-scaled portfolios, which increase portfolio exposure in volatile times, are not spanned by the original portfolios and expand the investor’s opportunity set. For industry portfolios and long-short factors, the investor’s mean-variance frontier shifts towards more desirable regions when volatility-scaled portfolios are added to the investment mix.
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