TD n. 624 2014

Márcio Gomes Pinto Garcia, Marcelo Medeiros, Francisco Eduardo de Luna e Almeida Santos.

A model of realized variance-covariance is proposed using a portfolio with the most liquid stock

assets of Ibovespa. The purpose is to evaluate the economic gains associated with following a

volatility timing strategy based on the model’s conditional forecasts. Comparing with traditional

volatility methods, we find that economic gains associated with realized measures perform well

when estimation risk is controlled and increase proportionally to the target return. When

expected returns are bootstrapped, however, performance fees are not significant, which is an

indication that economic gains of realized volatility are offset by estimation risk.