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Volatility Exposure for Strategic Asset Allocation

Marie Brière (), Alexandre Burgues and Ombretta Signori ()

No 08-034.RS, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: This paper examines the advantages of incorporating strategic exposure to equity volatility into the investment-opportunity set of a long-term equity investor. We consider two standard volatility investments: implied volatility and volatility risk premium strategies. To calibrate and assess the risk/return profile of the portfolio, we present an analytical framework offering pragmatic solutions for long-term investors seeking exposure to volatility. The benefit of volatility exposure for a conventional portfolio is shown through a mean / modified Value-at-Risk portfolio optimization. Pure volatility investment makes it possible to partially hedge downside equity risk, thus reducing the risk profile of the portfolio. Investing in the volatility risk premium substantially increases returns for a given level of risk. A well calibrated combination of the two strategies enhances the absolute and risk-adjusted returns of the portfolio.

Keywords: variance swap; volatility risk premium; higher moments; portfolio choice; Value at Risk (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Pages: 34 p.
Date: 2008
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Working Paper: Volatility exposure for strategic asset allocation (2010)
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