Hedging With Volatility

19 Pages Posted: 22 Aug 2018

Date Written: May 9, 2018

Abstract

A risk-averse investor with a long equity position is presumably interested in identifying a hedging strategy that protects the value of that investment. The common approach encompasses using either financial derivatives or holding assets (such as gold or Swiss francs) as portfolio hedges as they show negative correlation with equities. This paper proposes using volatility indexes as portfolio hedges instead; it shows that a volatility-based dynamic hedging strategy is the most effective at protecting the value of an equity investment.

Keywords: Minimum Variance Portfolio, Sharpe Ratio, Portfolio Rebalancing

Suggested Citation

Alagoa, Mario, Hedging With Volatility (May 9, 2018). Available at SSRN: https://ssrn.com/abstract=3230193 or http://dx.doi.org/10.2139/ssrn.3230193

Mario Alagoa (Contact Author)

Sacred Heart University ( email )

5151 Park Ave
Fairfield, CT 06432
United States

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