Thu, Jul 30, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

EDHEC research paper reveals benefits of diversifying equity portfolios with volatility derivatives

Wednesday, June 06, 2012
Following the collapse of worldwide equity markets in 2008, and the subsequent rally in long positions in equity volatility, interest has grown in the possible use of equity volatility derivatives as diversifiers for traditional and alternative portfolios. In a new publication entitled “The Benefits of Volatility Derivatives in Equity Portfolio Management,” produced with the support of Eurex Exchange, EDHEC-Risk researchers show how volatility derivatives can be used to optimise access to the equity risk premium in a controlled volatility risk environment, and to engineer equity portfolios with attractive downside-risk properties.

The key findings of the research are as follows:

  • A long volatility position shows a strongly negative correlation with respect to the underlying equity portfolio and adding a long volatility exposure to an equity portfolio results in a substantial improvement of the risk-adjusted performance of the portfolio.
  • The benefits of the long volatility exposure are found to be the strongest in market downturns, where they are needed the most.
  • The benefits of adding volatility exposure to equity portfolios are also found to be robust with respect to the introduction of trading costs associated with rolling over volatility derivatives contracts.

Noël Amenc, Director of EDHEC-Risk Institute, said, “This research proposes a novel approach to the design of attractive equity solutions with managed volatility, based on mixing a well-diversified equity portfolio with volatility derivatives, as opposed to minimising equity volatility through minimum variance approaches, and shows that trading in volatility index futures or options can provide access to the equity risk premium while allowing for explicit management of the volatility risk budget.”

Michael Peters, member of the Eurex Executive Board, said, “As a longstanding partner of EDHEC-Risk Institute’s research, we regard academic research and education as one major element of our business strategy. This cutting-edge academic research on optimal approaches to investing in volatility proves the potential usefulness of trading volatility futures and options in an equity portfolio management context. My expectation is that the study will be welcomed by the international investment management community.”

A copy of “The Benefits of Volatility Derivatives in Equity Portfolio Management” can be downloaded here: Source

fg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Opalesque Exclusive: Despite bumpy June/July, CTAs hold on[more]

    Bailey McCann, Opalesque New York: To say that things have been rocky in managed futures recently is putting it mildly. In June, the industry saw its worst month on a performance basis in the past four years. Then yesterday,

  2. Opalesque Exclusive: Michael E. Lewitt: Greece, Puerto Rico, China stock market problems are symptoms of global underlying disease[more]

    Benedicte Gravrand, Opalesque Geneva: Michael E. Lewitt, manager of the Third Friday Total Return Fund, L.P., author and market commentator, says in a Q2 letter

  3. Investing - Hedge funds, seeing opportunity, invest in struggling hotels in Puerto Rico[more]

    From NYTimes.com: Puerto Rico’s tourism industry has fallen victim to the island’s struggling economy, hit by one misfortune after another. In March, the San Juan Beach Hotel filed for bankruptcy. This week, the Condado Plaza Hilton was forced to close its casino. But nearly two thousand miles away,

  4. Investing - Hedge fund billionaires bet on London as revival gathers pace[more]

    From Bloomberg.com: London’s fund industry is bouncing back, and U.S. billionaires Steven A. Cohen and Ken Griffin are grabbing a piece of the action. Griffin’s Citadel and Millennium Management, a hedge fund run by Israel Englander, have bulked up in London, where asset growth is outpacing the U.S.

  5. Opalesque Exclusive: London quant shop launches new improved strategy[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: Simon Wajcenberg, CEO of K1T Capital Ltd, a systematic quant based hedge fund asset manager based in London

 

banner