RT Journal Article
SR Electronic
T1 A Constant-Volatility Framework for Managing Tail Risk
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 28
OP 40
DO 10.3905/jpm.2013.39.2.028
VO 39
IS 2
A1 Alexandre Hocquard
A1 Sunny Ng
A1 Nicolas Papageorgiou
YR 2013
UL https://pm-research.com/content/39/2/28.abstract
AB Since Lehman Brothers collapsed in 2008, tail-risk hedging has become an increasingly important concern for investors. Traditional approaches, such as purchasing options or variance swaps as insurance, are often expensive, illiquid, and result in a substantial drag on performance. A more prudent, cost-effective way to maintain a constant risk exposure is to actively manage portfolio exposure according to the prevailing volatility level within underlying assets. The authors implement a robust methodology based on Dybvig’s payoff distribution model to target a constant level of volatility and normalize monthly returns. This approach to portfolio and risk management can help investors obtain their desired risk exposures over both short and longer time frames, reduce exposure to tail risk, and in general increase portfolios’ risk-adjusted performance.TOPICS: Tail risks, volatility measures, financial crises and financial market history