Volatility as an Asset Class for Long-Term Investors
AbstractThis work shows how long-term investors can benefit from adding volatility as an asset class to their portfolio. Two types of "structural" exposure – long implied volatility and long volatility risk premium – are now simple to implement. Implied volatility exposure can be used to significantly reduce the risk profile of the portfolio, and especially extreme risks. Adding a volatility risk premium investment is less appealing : it substantially increases returns for a given level of risk, but at the cost of higher extreme risks. However a combination of the two volatility strategies is very attractive, thanks to fairly effective reciprocal hedging during periods of market stress. It delivers enhanced absolute and risk-adjusted returns, with smaller extreme risks than a traditional portfolio. Over the long term, volatility strategies make it possible to build portfolios that are more efficient than a pure-bond or equity/bond investment.
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Bibliographic InfoPaper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/9293.
Date of creation: 2009
Date of revision:
Publication status: Published in Interest Rate Models, Asset Allocation and Quantitative Techniques for Central Banks and Sovereign Wealth Funds, . pp. 265-280.Length: 15 pages
Market; Equity prices; strategies; investment decision;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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