Friday, April 14, 2017

Is It a Good Time to Go Long Volatility?

Last week, in the post entitled

This ETF Helps Investors Hedge Market Risks

we discussed how it’s important to hedge against a market downturn, and pointed out some strategies for doing it.

Yesterday, Brian Chappatta reported that some big portfolio managers already started buying volatility

Some of the world’s biggest bond managers have been waiting for this moment. Rather than ponder the sustainability of the reflation trade and its implication for yields, investors including Rick Rieder at BlackRock Inc. and Bob Michele at J.P. Morgan Asset Management say they’ve been betting that price swings will grow more dramatic in the days and months ahead. That’s already borne fruit this week, with the CBOE/CBOT index of 10-year Treasury note volatility, known by its ticker TYVIX, jumping to the highest closing level since February. Read more

On the research side,  Chrilly Donninger timely published a paper on how to protect a portfolio from a tail risk event:

Protecting an equity market portfolio with VIX-Futures eats not only the kurtosis but also the profits of the portfolio. Being constantly VIX-Futures long is too expensive Therefore one has to find an  appropriate timing strategy.  This working paper presents a Hidden-Markov-Model which not only has  a reasonable tail-risk-protection but even improves the overall return of the SPY. The strategy is – at  least in the historic simulation – close to what is called in German an “eierlegende Wollmilchsau” (“egg-laying wool-milk-sow”). Read more

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