Causal Dependency in Extreme Returns

Having introduced situated affectivity, I locate the contributions to this section within this new framework: Carr and colleagues argue that embodied emotional processes strongly (though not indispensably) influence cognitive and motivational tasks. Bypassing the debate on causal dependency (embeddedness) and co-constitution (extendedness), I propose the category of environmental affective scaffolding as the one Hobson’s contribution fits in. He stresses the essential impact an infant’s capacity for social-affective relatedness has on her cognitive development. The enactive approach, as introduced by Colombetti, accounts well for the dynamical couplings between two or more emoters (or an emoter and her environment). If more persons are involved, they constitute a case of distributed rather than extended affectivity, since no single individual is the hub of such an affective process. The contribution of Zahavi and Michael promises to apply the 4E approach to empathy. Considering environmental scaffolds to empathy might enrich it.

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The Impact of Volatility Targeting

The Journal of Portfolio Management ◽

10.3905/jpm.2018.45.1.014 ◽

2018 ◽

Keyword(s):

Sharpe Ratio ◽

Leverage Effect ◽

Left Tail ◽

Risk Parity ◽

Asset Classes ◽

Equity Portfolios ◽

Sharpe Ratios ◽

Tail Events ◽

The Impact ◽

Extreme Returns

Recent studies show that volatility-managed equity portfolios realize higher Sharpe ratios than portfolios with a constant notional exposure. The authors show that this result only holds for risk assets, such as equity and credit, and they link this finding to the so-called leverage effect for those assets. In contrast, for bonds, currencies, and commodities, the impact of volatility targeting on the Sharpe ratio is negligible. However, the impact of volatility targeting goes beyond the Sharpe ratio: It reduces the likelihood of extreme returns across all asset classes. Particularly relevant for investors, left-tail events tend to be less severe because they typically occur at times of elevated volatility, when a target-volatility portfolio has a relatively small notional exposure. We also consider the popular 60–40 equity–bond balanced portfolio and an equity–bond–credit–commodity risk parity portfolio. Volatility scaling at both the asset and portfolio level improves Sharpe ratios and reduces the likelihood of tail events.

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