The performance of excess volatility strategy under tail risk controls

This study examines excess volatility portfolios and introduces a novel Conditional Value-at-Risk (CVaR) tail risk management strategy. Empirical analysis from 2011–2022 demonstrates that excess volatility portfolios outperform the benchmark 60/40 portfolio during normal markets but face significant left-tail risks during crises. The proposed CVaR strategy effectively mitigates these risks, providing more stable returns and protection against large drawdowns, albeit with reduced profitability. While traditional volatility targeting improves market timing and reduces systematic risks, the CVaR approach further diminishes exposure to behavioral factors and shifts the portfolio toward a more conservative profile. Factor analysis reveals that excess volatility portfolios favor small-cap and value stocks, while tail risk management minimizes these exposures, enhancing stability. The CVaR strategy proves particularly valuable during extreme market events, and contributes a comprehensive framework for balancing profitability, risk, and investment style in volatile markets.