Volatility Exposure for Strategic Asset Allocation
AbstractThis paper examines the advantages of incorporating strategic exposure to equity volatility into the investment-opportunity set of a long-term equity investor. We consider two standard volatility investments: implied volatility and volatility risk premium strategies. To calibrate and assess the risk/return profile of the portfolio, we present an analytical framework offering pragmatic solutions for long-term investors seeking exposure to volatility. The benefit of volatility exposure for a conventional portfolio is shown through a mean / modified Value-at-Risk portfolio optimization. Pure volatility investment makes it possible to partially hedge downside equity risk, thus reducing the risk profile of the portfolio. Investing in the volatility risk premium substantially increases returns for a given level of risk. A well calibrated combination of the two strategies enhances the absolute and risk-adjusted returns of the portfolio.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 08-034.RS.
Length: 34 p.
Date of creation: 2008
Date of revision:
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More information through EDIRC
variance swap; volatility risk premium; higher moments; portfolio choice; Value at Risk;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-25 (All new papers)
- NEP-FMK-2008-11-25 (Financial Markets)
- NEP-RMG-2008-11-25 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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