When is the price of risk high ? ∗

We show that the price of risk and quantity of risk are negatively correlated in the time-series for benchmark factors in equities and currencies. Managed portfolios that increase factor exposures when volatility is low and decrease exposure when volatility is high thus produce positive alphas and increase factor Sharpe ratios. We also find volatility timing to be more beneficial to a mean variance investor than expected return timing by a fairly wide margin. These portfolio timing strategies are simple to implement in real time and are contrary to conventional wisdom because volatility tends to be high at the beginning of recessions and crises when selling is often viewed as a mistake. The facts are potentially puzzling because they imply that effective risk aversion would have to be low when volatility is high, and vice versa. ∗Yale School of Management. We thank Nick Barberis and Jon Ingersoll for comments. We also thank Ken French and Adrien Verdelhan for making data publicly available.