Volatility Exposure for Strategic Asset Allocation
Brière, Marie; Burgues, Alexandre; Signori, Ombretta (2010), Volatility Exposure for Strategic Asset Allocation, Journal of Portfolio Management, 36, 3, p. 105-16
TypeArticle accepté pour publication ou publié
Journal nameJournal of Portfolio Management
Euromoney Institutional Investor
MetadataShow full item record
Abstract (EN)The authors 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 long-term 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.
Subjects / Keywordsportfolio choice; higher moments; volatility risk premium; variance swap; Value at Risk
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