What is the impact of higher asset class volatility on corridor width?

When considering the relationship between higher asset class volatility and corridor width, it's important to understand how corridors function in the context of risk management and asset allocation, particularly within a liability-driven investment framework.

A corridor is a range specified around a target asset allocation, which serves as a limit to the allowable deviation from that target. This control mechanism is crucial for maintaining an appropriate risk level and preventing excessive exposure to any particular asset class.

Higher asset class volatility generally implies that the returns of those assets fluctuate more significantly. In response to this increased uncertainty, the strategy often necessitates a wider corridor. This broader range allows for more flexibility in the asset allocation process, accommodating the inherent fluctuations in asset values without necessitating frequent rebalancing or breaching the limits of acceptable risk exposure.

A narrower corridor would be inappropriate in the context of heightened volatility, as it would constrain the portfolio too tightly in a manner that could lead to forced reallocation during volatile periods, potentially harming long-term strategic positioning and performance.

Thus, in light of the increased risk brought about by asset class volatility, one would typically envision a wider corridor to provide the necessary latitude to manage that risk effectively. A wider corridor can reflect the reality of greater fluctuations and help to balance the need for a stable