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Conditional Volatility Targeting

Student: Dekkusheva Laura

Supervisor: Dmitriy Alexandrovich Kachalov

Faculty: International College of Economics and Finance

Educational Programme: Double degree programme in Economics of the NRU HSE and the University of London (Bachelor)

Year of Graduation: 2021

In the performed analysis, the Conditional Volatility Targeting strategy that adjusts risk exposures during extreme volatility states was implemented to the S&P500 index futures and the 3 factors of Fama and French for the period of 01.03.2004 to 31.03.2021. This strategy can be implemented in real life because it does nor require any data that is not known at time of the performance. For the analyses of this strategy historical data of the above mentioned variable was used, based on which realized volatilities and forecasted volatilities using ARCH(1) model. For the periods of extreme volatility the strategy involves risk management toward specific variable for future possible benefit. As for the comparative analysis Sharpe ratio and maximum drawdowns were used. As the result, there was not found any consistent improvement of the Sharpe ratio or the decrease of the absolute value of the drawdowns in all factors that were analyzed, though to some cases some improvement are still present. For the significance testing of Sharpe ratios, I used t-test for differences in means.

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