Volatility Management in Factor Investing: Evidence from the United States, Europe and Developed Markets

Abstract

This paper examines whether volatility management enhances the risk-return profile of factor investing strategies based on the momentum factor and the five-factor model across major developed equity markets. The study uses daily and monthly data from the Kenneth R. French database for the United States, Europe, and Developed Markets, covering long samples through December 2023. Volatility-managed factor returns are constructed by scaling original factor returns by functions of their realised volatility and are then evaluated against the corresponding unmanaged series. Performance is assessed by changes in average returns, volatility, and the Sharpe ratio, comparing volatility-managed factors with their unmanaged counterparts across regions and volatility-estimation horizons. The analysis evaluates whether the effectiveness of volatility management is consistent across factors, markets and estimation windows. Results show that volatility management can materially improve risk-adjusted performance for some factors and regions, particularly for momentum and profitability, although benefits are not uniform across all factors or geographies. These findings provide updated evidence on volatility management in factor investing and offer insights into the behaviour of volatility-managed factor strategies, although implementation costs and trading frictions are not incorporated in the reported results.