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Volatility Strategies for Global and Country Specific European Investors

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  • Signori, Ombretta
  • Malongo, Hassan
  • Fermanian, Jean-David
  • Brière, Marie
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    Abstract

    Adding volatility exposure to an equity portfolio offers interesting opportunities for long-term investors. This article discusses the advantages of adding a long volatility strategy for a protection to a global European equity portfolio and to specific equity portfolios based in "core" or "peripheral" countries within the euro zone. A European investor today has the choice of investing in US or European equity volatility. We check whether a long volatility strategy based on VSTOXX futures is better than a strategy based on VIX futures. The benefit of using volatility strategies as a hedge for equities is shown through a Mean/Modified-CVaR portfolio optimization. We find that long volatility strategies offer valuable protection to all European equity investors. A long volatility strategy based on VSTOXX futures offers better protection than a similar one based on VIX futures. It reduces the risk of an equity portfolio more significantly, while providing more attractive returns. For specific European investors, and despite major differences in local European equity markets, our long volatility strategy shows a certain homogeneity and provides efficient protection, whatever the country.

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    File URL: http://basepub.dauphine.fr/xmlui/bitstream/123456789/9298/1/SSRN-id1945703.pdf
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    Bibliographic Info

    Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/9298.

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    Date of creation: 2012
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    Publication status: Published in Bankers, markets & investors, 2012, no. 121. pp. 17-29.Length: 12 pages
    Handle: RePEc:dau:papers:123456789/9298

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    Related research

    Keywords: Investment strategy; Portfolio choice; Conditional Value-at-Risk; Implied volatility; Hedging;

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    1. Dirk Tasche, 2002. "Expected Shortfall and Beyond," Papers cond-mat/0203558, arXiv.org, revised Oct 2002.
    2. William N. Goetzmann & Jonathan E. Ingersoll, Jr. & Matthew I. Spiegel & Ivo Welch, 2002. "Sharpening Sharpe Ratios," Yale School of Management Working Papers ysm29, Yale School of Management.
    3. Danielsson, Jon, 2002. "The emperor has no clothes: Limits to risk modelling," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1273-1296, July.
    4. Brière, Marie & Burgues, Alexandre & Signori, Ombretta, 2010. "Volatility Exposure for Strategic Asset Allocation," Economics Papers from University Paris Dauphine 123456789/7739, Paris Dauphine University.
    5. Marie Briere & Alexandre Burgues & Ombretta Signori, 2008. "Volatility Exposure for Strategic Asset Allocation," Working Papers CEB 08-034.RS, ULB -- Universite Libre de Bruxelles.
    6. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
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