25/04/2017

The Alternative View: How Fast Should We Measure Volatility?

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In Short

A common theme across systematic strategies is the concept of controlling the risk of strategy returns. 

This is most commonly achieved by scaling asset positions inversely-proportionally to a volatility forecast for that asset; all of Fulcrum’s systematic strategies employ some form of this scaling mechanism. An essential input into any strategy is therefore a volatility forecast for each asset. What is the optimal lookback horizon for volatility forecasts, and is there a trade-off between better estimates and the strategy’s returns?

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