Volatility and returns : Evidence from China

Size, value, and momentum factors and industry portfolios in the Chinese A-share stock market tend to have higher returns in the months following high volatility. Due to this positive relationship between lagged volatility and returns, volatility-managed portfolios of Moreira and Muir (Volatility-managed portfolios. Journal of Finance, 72, 1611-1644), which reduce portfolio exposure when volatility is high, are spanned by the original portfolios and do not improve the investor's opportunity set. Volatility-scaled portfolios, which increase portfolio exposure in volatile times, are not spanned by the original portfolios and expand the investor's opportunity set. The investor's mean-variance frontier shifts into more desirable regions when volatility-scaled portfolios are included.