The Economic Value of Volatility Timing


  • Jeff Fleming,

  • Chris Kirby,

  • Barbara Ostdiek

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    • Fleming and Ostdiek are at Rice University and Kirby is at the Australian Graduate School of Management. This paper was completed while Kirby was at the University of Texas at Dallas. We have benefitted from many helpful comments by René Stulz (the editor), an anonymous referee, Amir Barnea, Jay Coughenour, Rob Engle, Wayne Ferson, John Graham, David Hsieh, David Ikenberry, Ravi Jagannathan, Andrew Karolyi, Uri Loewenstein, Jack Mosevich, Ehud Ronn, Paul Seguin, Guofu Zhou, and seminar participants at the University of Minnesota, University of Utah, Texas A&M University, the 1998 Chicago Board of Trade Spring Research Seminar, the 1998 Conference on Financial Economics and Accounting, the 1999 Computational Finance Conference, the 1999 Computational and Quantitative Finance Conference, the 1999 AGSM Accounting and Finance Research Camp, and the 2000 American Finance Association meetings.


Numerous studies report that standard volatility models have low explanatory power, leading some researchers to question whether these models have economic value. We examine this question by using conditional meanm-variance analysis to assess the value of volatility timing to short-horizon investors. We find that the volatility timing strategies outperform the unconditionally efficient static portfolios that have the same target expected return and volatility. This finding is robust to estimation risk and transaction costs.