Tail Hedging Is Not As Easy As You Think
Convexity can provide explosive payoffs from unlikely events. It’s a powerful weapon to wield, but like most weapons, it could be inefficient or even dangerous in the hands of the untrained.
Strategies to Mitigate Tail Risk
Investors care about more than just returns. They also care about risk. Thus, prudent investors include consideration of strategies that can provide at least some protection against adverse events that lead to left tail risk (portfolios crashing). The cost of that protection (the impact on expected returns) must play an important role in deciding whether to include them. For example, buying at-the-money puts, a strategy that eliminates downside risk, should have returns no better than the risk-free rate of return, making that a highly expensive strategy.
Are Financial Crises Predictable?
Who among us wouldn't want to be the savior that predicts a market crisis and saves our clients from losses in capital -- or even better -- profits from them? A central topic of interest for academics is whether there are more precise tools to predict financial crises. Those who believe so dedicate their efforts to finding early warning indicators.
Portfolio Strategies for Volatility Investing
Negative outcomes from unconditional long exposure to the VIX led Campasano to examine the performance of an Enhanced Portfolio that dynamically invests in the S&P 500 Index and VIX futures.
The Vanishing Illiquidity Premium
Liquidity—the ability to buy and sell significant quantities of a given asset quickly, at low cost, and without a major price concession—is valuable to investors. [...]
How to Measure and Understand Portfolio Tail Risk Events
Arnold Polanski, Evarist Stoja, Frank WindmeijerJournal of Applied Econometrics, 2019A version of this paper can be found here.Want to read our summaries of academic finance [...]
Does Gold do What it is Supposed to do?
Gold, the Golden Constant, COVID-19, "massive Passives," and Déjà Vu Claude Erb, Campbell R. Harvey, Tadas ViskantaA version of this paper can be found here.Want [...]
How Trend Following Strategies Shape Return Distributions
Some Observations on Trend Following: A Binomial Perspective David M. ModestWorking Paper, QLS Partners LPA version of this paper can be found hereWant to read our [...]
Ways to Measure Extreme Downside Risk
Richard D.F. Harris , Linh H. Nguyen and Evarist Stoja Journal of International Financial Markets, Institutions, and Money, 2019A version of this paper can be [...]
Is There a Tail Risk Premium in Stocks?
It has been well documented both that stock returns have much fatter tails than a normal distribution would generate, and that tail events occur much [...]
Volatility, Risk Management, and Market Chaos: Research that Might Help
Given the recent market decline, we thought it would be helpful to review some of our blog posts from the past that may be relevant [...]
Crisis Proof Your Portfolio: part 1/2
The Best of Strategies for the Worst of Times: Can Portfolios Be Crisis Proofed? Campbell R. Harvey, Edward Hoyle, Sandy Rattray, Matthew Sargaison, Dan Taylor, [...]
Pathetic Protection via Protective Puts
Pathetic Protection: the Elusive Benefits of Protective Puts Roni IsraelovJournal of Alternative Investments, Winter 2019A version of this paper can be found hereWant to read our summaries of academic [...]
Tail Risk Hedging: An Alternative Approach to Risk Management
This article proposes tail risk hedging (TRH) as an alternative model for managing risk in investment portfolios. The standard risk management approach involves a significant [...]