Archive for the ‘Implied volatility’ Category

Volatility as an Asset Class

14 Mar

Article by: Julien Lascar
Published by: Societe Generale Corporate & Investment Banking
Date: Jun 2012

This is a presentation on volatility, tail hedging, and alternative investments given at the Asian Insurance Forum.

Full article (PDF): Link


Are VIX Futures ETPs Effective Hedges?

23 Feb

Article by: Geng Deng, Craig J. McCann, Olivia Wang
Published by: The Journal of Index Investing
Date: 27 Jun 2012

“Exchange-traded products (ETPs) linked to futures contracts on the CBOE S&P 500 Volatility Index (VIX) have grown in volume and assets under management in recent years,  in part because  of  their perceived potential to hedge against stock market losses.

“In this paper we study whether VIX-related ETPs can effectively hedge a portfolio of stocks. We find that while the VIX increases when large stock market losses occur, ETPs which track short term VIX futures indices are not effective hedges for stock portfolios because of the negative roll yield accumulated by such futures-based ETPs. ETPs which track medium term VIX futures indices suffer less from negative roll yield and thus appear somewhat better  hedges for stock portfolios. Our findings cast doubt on the potential diversification benefit from holding ETPs linked to VIX futures contracts.

“We also study the effectiveness of VIX ETPs in hedging Leveraged ETFs (LETFs) in which rebalancing effects lead to significant losses for buy-and-hold  investors during periods of high volatility. We find that VIX futures ETPs are usually not effective hedges for LETFs.”

Full article (PDF): Link

Comments Off

Posted in Implied volatility


Pricing of Variance and Volatility Swaps in a stochastic volatility and jump framework

22 Jan

Article by: Emil S. F. Stamp, Thomas F. Thorsen
Published by: Department of Business Studies, Aarhus University
Date: Aug 2011

“Volatility has always been considered a key measure within the field of finance. Financial markets have changed significantly over the last century and the recent financial crises have reshaped the markets in such a way that the role of volatility has become even more pronounced than it was before. The concept finds its use within important areas such as risk management, valuation and asset pricing in general, trading and many more.

“Increased market complexity have historically spurred the demand for more exotic derivatives for directional trading and hedging. In the 1990s a new asset class arose which provided the investor with the opportunity to take a direct position, not in the underlying itself, but in its volatility. With this new derivative class, volatility is no longer viewed as side product inherent in other derivatives, but as an independent asset class of its own. Variance and volatility swaps were the first and most fundamental products to be introduced in this asset class and ever since their introduction, the market for them has exploded. The products are in nature forward contracts which at maturity exchange the difference between a fixed strike and realized variance/volatility, scaled by a predetermined notional. Both are traded OTC which makes it difficult to assess the true market size but recent estimates indicate daily trading volumes of more than $35 million notional. Both market and academic interest for these products has increased in line with demand and much research has recently been devoted to develop efficient pricing methods.”

Full article (PDF): Link


Practical Volatility and Correlation Modeling for Financial Market Risk Management

14 Oct

Article by: Torben G. Andersen, Tim Bollerslev, Peter F. Christoffersen, Francis X. Diebold
Published by: National Bureau of Economic Research
Date: Jan 2005

“What do academics have to offer market risk management practitioners in financial institutions? Current industry practice largely follows one of two extremely restrictive approaches: historical simulation or RiskMetrics. In contrast, we favor flexible methods based on recent developments in financial econometrics, which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions — in particular, real-time risk tracking in very high-dimensional situations — impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities, hopefully stimulating the development of improved market risk management technologies that draw on the best of both worlds.”

Full article (PDF): Link

Comments Off

Posted in Implied volatility, Realized volatility

© Copyright 2018 RealVol LLC. All rights reserved