Volatility (e.g., VIX)

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.

Focus on Income Can Undermine Returns: The Case of Covered Calls

Covered calls implemented to deliver higher derivative income should be expected to have (1) lower total returns, (2) higher tax realizations along the path, and (3) a more negatively skewed return profile. Investors who allocate to these strategies for their income alone, without accounting for these other considerations, might have made a devil’s bargain

Dissecting the Idiosyncratic Volatility Puzzle

Idiosyncratic volatility (IVOL) is the volatility of a security that cannot be explained by overall market volatility—it is the risk unique to a particular security. IVOL contrasts with systematic risk, which is the risk that affects all securities in a market (such as changes in interest rates or inflation) and, therefore cannot be diversified away. On the other hand, the risks of high IVOL stocks can at least be reduced through diversification.

Has the Stock Market Systematically Changed?

This time is almost always different, it seems, but the data suggest that things are typically always the same: chaotic and volatile. Stock market investors should be prepared for large short-term moves in stocks and they should be skeptical of narratives suggesting a causal relationship between environmental variables and future volatility.

Are Stock Market Bubbles Identifiable?

Robin Greenwood, Andrei Shleifer, and Yang You authors of the study “Bubbles for Fama”, published in the January 2019 issue of the Journal of Financial Economics evaluated Fama's claim that stock prices do not exhibit price bubbles. Based on a fixed threshold for the industry price increases (e.g., a 100 percent price run-up during two consecutive years) to filter their events and to analyze what happens afterward, they examined U.S. industry returns over the period 1926‒2014 (covering 40 episodes) and international sector returns (1985‒2014).

Do Option Prices Inform Stock Returns?

In perfectly efficient markets, option prices should not convey any new information or contribute to the price discovery of underlying assets. However, if markets are [...]

Volatility Expectations and Returns

A large body of research, including the 2017 study “Tail Risk Mitigation with Managed Volatility Strategies” by Anna Dreyer and Stefan Hubrich, demonstrates that while [...]

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