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Effectiveness of Various Risk Controls during the COVID-19 Crash

| | Posted in: Strategic Allocation, Volatility Effects

How well did previously identified portfolio risk management strategies work during the COVID-19 market crash? In their July 2020 paper entitled "Strategic Risk Management: Out-of-Sample Evidence from the COVID-19 Equity Selloff", Campbell Harvey, Edward Hoyle, Sandy Rattray and Otto Van Hemert extended analyses of risk management strategies they identified in a 2016-2019 series of papers with an out-of-sample test of the February-March 2020 stock market sell-off. These strategies include:

  • Long put options, short credit risk, long bonds or long gold.
  • Trend following based on time series/intrinsic momentum (past return divided by volatility of returns over a specified lookback interval) or on moving average crossovers.
  • Holding defensive stocks (based on profitability, payout, growth, safety or quality).
  • Volatility targeting (increasing/decreasing exposure when past volatility is relative low/high).
  • Rebalancing a stocks-bonds portfolio only half way and only when recent (1, 3 or 12 months) portfolio return is above its historical average.

Extending analyses from their prior papers through March 2020 to capture the COVID-19 crash, they find that:

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