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Volatility Exposure for Strategic Asset Allocation

  • Brière, Marie
  • Burgues, Alexandre
  • Signori, Ombretta

The authors examine the advantages of incorporating strategic exposure to equity volatility into the investment opportunity set of a long-term equity investor. They consider two standard volatility investments: implied volatility and volatility risk premium strategies. An analytical framework, which offers pragmatic solutions for long-term investors who seek exposure to volatility, is used to calibrate and assess the risk-return profiles of portfolios. The benefit of volatility exposure for a conventional portfolio is shown through a mean-modified value at risk portfolio optimization. A pure volatility investment makes it possible to partially hedge downside equity risk and thus reduce the risk profile of a portfolio, while an investment in the volatility risk premium substantially increases returns for a given level of risk. A well-calibrated combination of the two strategies enhances both the absolute and risk-adjusted returns of a portfolio.

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Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/7739.

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Date of creation: 2010
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Publication status: Published in Journal of Portfolio Management, 2010, Vol. 36, no. 3. pp. 105-16.Length: -89 pages
Handle: RePEc:dau:papers:123456789/7739
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