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Volatility Exposure for Strategic Asset Allocation

Journal of Portfolio Management, Vol. 36, No. 3, pp. 105-116, Spring 2010

33 Pages Posted: 14 Feb 2011  

Ombretta Signori

AXA Investment Managers

Marie Briere

Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles

Alexandre Burgues

Amundi Asset Management

Date Written: May 14, 2009

Abstract

This paper examines the advantages of incorporating strategic exposure to equity volatility into the investment-opportunity set of a long-term equity investor. We consider two standard volatility investments: implied volatility and volatility risk premium strategies. To calibrate and assess the risk/return profile of the portfolio, we present an analytical framework offering pragmatic solutions for long-term investors seeking exposure to volatility. The benefit of volatility exposure for a conventional portfolio is shown through a mean / modified Value-at-Risk portfolio optimization. Pure volatility investment makes it possible to partially hedge downside equity risk, thus reducing the risk profile of the portfolio. Investing in the volatility risk premium substantially increases returns for a given level of risk. A well calibrated combination of the two strategies enhances the absolute and risk-adjusted returns of the portfolio.

Keywords: variance swap, volatility risk premium, higher moments, portfolio choice, Value at Risk

JEL Classification: G11, G12, G13

Suggested Citation

Signori, Ombretta and Briere, Marie and Burgues, Alexandre, Volatility Exposure for Strategic Asset Allocation (May 14, 2009). Journal of Portfolio Management, Vol. 36, No. 3, pp. 105-116, Spring 2010. Available at SSRN: https://ssrn.com/abstract=1761276

Ombretta Signori (Contact Author)

AXA Investment Managers ( email )

Coeur Défense Tour B - La Défense 4
100 Esplanade du Général de Gaulle
PARIS, Paris La Défense Cedex 92932

Marie Briere

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Paris Dauphine University ( email )

place du Maréchal de Lattre de Tassigny
Paris, 75016
France

Université Libre de Bruxelles ( email )

Brussels
Belgium

Alexandre Burgues

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

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