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Returns to tail hedging

Peter Bell ()

MPRA Paper from University Library of Munich, Germany

Abstract: Tail hedging is a portfolio management strategy meant to reduce the risk of large losses. For an investor who holds a stock market index fund, the strategy entails buying out of the money put options on the index. Research suggests the strategy works well in practice and I explore the returns to tail hedging in a simple theoretical model. I calculate descriptive statistics for the returns to tail hedging when the stock price has either a normal or fat tailed distribution. I find that tail hedging is rewarding when stock prices have fat tails.

Keywords: Portfolio management; tail option; fat tail; simulation. (search for similar items in EconPapers)
JEL-codes: B50 C63 G11 G32 (search for similar items in EconPapers)
Date: 2015-02-13
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:62160

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