Returns to tail hedging
Peter Bell ()
MPRA Paper from University Library of Munich, Germany
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)
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-rmg
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