Volatility as an Asset Class for Long-Term Investors
This 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.
|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|
|Contact details of provider:|| Web page: http://www.dauphine.fr/en/welcome.html|
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