Volatility Strategies for Global and Country Specific European Investors
Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles
Amundi Asset Management; Université de Paris-Dauphine (Ceremade)
AXA Investment Managers
October 17, 2011
Adding volatility exposure to an equity portfolio offers interesting opportunities for long-term investors. This article discusses the advantages of adding a long volatility strategy for a protection to a global European equity portfolio and to specific equity portfolios based in "core" or "peripheral" countries within the euro zone. A European investor today has the choice of investing in US or European equity volatility. We check whether a long volatility strategy based on VSTOXX futures is better than a strategy based on VIX futures. The benefit of using volatility strategies as a hedge for equities is shown through a Mean/Modified-CVaR portfolio optimization. We find that long volatility strategies offer valuable protection to all European equity investors. A long volatility strategy based on VSTOXX futures offers better protection than a similar one based on VIX futures. It reduces the risk of an equity portfolio more significantly, while providing more attractive returns. For specific European investors, and despite major differences in local European equity markets, our long volatility strategy shows a certain homogeneity and provides efficient protection, whatever the country.
Number of Pages in PDF File: 25
Keywords: Investment strategy, Portfolio choice, Conditional Value-at-Risk, Implied volatility, Hedging
JEL Classification: G11, G15, G17working papers series
Date posted: October 19, 2011 ; Last revised: October 27, 2011
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