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Volatility exposure for strategic asset allocation

Marie Brière (), Alexandre Burgues and Ombretta Signori

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: Brière, Burgues, and Signori examine the advantages of incorporating strategic exposure to equity volatility into the investment opportunity set of a long-term equity investor. They consider two standard volatility investments: implied volatility and volatility risk premium strategies. An analytical framework, which offers pragmatic solutions for longterm investors who seek exposure to volatility, is used to calibrate and assess the risk - return profiles of portfolios.The benefit of volatility exposure for a conventional portfolio is shown through a mean-modified Value at Risk portfolio optimization. A pure volatility investment makes it possible to partially hedge downside equity risk and thus reduce the risk profile of a portfolio, while an investment in the volatility risk premium substantially increases returns for a given level of risk. A well-calibrated combination of the two strategies enhances both the absolute and risk-adjusted returns of a portfolio.

Date: 2010-03
Note: SCOPUS: ar.j
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Citations: View citations in EconPapers (34)

Published in: Journal of portfolio management (2010) v.36 n° 3,p.105-116

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