Investment - Articles - Diversifying Equity Portfolios with Volatility Derivatives


 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 via the following link:

 EDHEC-Risk Publication Benefits of Volatility Derivatives in Equity Portfolio Management
  

Back to Index


Similar News to this Story

Trump talk pushes oil down but markets remain unsettled
Reports that President Trump is inclined to end the war, even without controlling the Strait of Hormuz, have pushed down oil prices. Markets remain sk
Middle East conflict keeps investors on high alert
Volatile week ahead as Vix reaches tariff tantrum levels. UK markets battle with rate hike expectations. US markets brace for a string of economic dat
Bank of Mum and Dad comes at a cost
Three in five (61%) parents of adult children provide financial support. This includes everyday living costs (26%), property help (13%), children’s sa

Site Search

Exact   Any  

Latest Actuarial Jobs

Actuarial Login

Email
Password
 Jobseeker    Client
Reminder Logon

APA Sponsors

Actuarial Jobs & News Feeds

Jobs RSS News RSS

WikiActuary

Be the first to contribute to our definitive actuarial reference forum. Built by actuaries for actuaries.