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EDHEC-Risk Research Reveals Benefits of Diversifying Equity Portfolios with Volatility Derivatives

Following the collapse of worldwide equity markets in 2008, and the subsequent rally in long positions in equity volatility, interest has grown in the possible use of equity volatility derivatives as diversifiers for traditional and alternative portfolios. In a new publication entitled “The Benefits of Volatility Derivatives in Equity Portfolio Management,” produced with the support of Eurex Exchange, EDHEC-Risk researchers show how volatility derivatives can be used to optimise access to the equity risk premium in a controlled volatility risk environment, and to engineer equity portfolios with attractive downside-risk properties.

The key findings of the research are as follows:
- A long volatility position shows a strongly negative correlation with respect to the underlying equity portfolio and adding a long volatility exposure to an equity portfolio results in a substantial improvement of the risk-adjusted performance of the portfolio.
- The benefits of the long volatility exposure are found to be the strongest in market downturns, where they are needed the most.
- The benefits of adding volatility exposure to equity portfolios are also found to be robust with respect to the introduction of trading costs associated with rolling over volatility derivatives contracts.

Noël Amenc, Director of EDHEC-Risk Institute, said, “This research proposes a novel approach to the design of attractive equity solutions with managed volatility, based on mixing a well-diversified equity portfolio with volatility derivatives, as opposed to minimising equity volatility through minimum variance approaches, and shows that trading in volatility index futures or options can provide access to the equity risk premium while allowing for explicit management of the volatility risk budget.”

Michael Peters, member of the Eurex Executive Board, said, “As a longstanding partner of EDHEC-Risk Institute’s research, we regard academic research and education as one major element of our business strategy. This cutting-edge academic research on optimal approaches to investing in volatility proves the potential usefulness of trading volatility futures and options in an equity portfolio management context. My expectation is that the study will be welcomed by the international investment management community.”

A copy of “The Benefits of Volatility Derivatives in Equity Portfolio Management” can be downloaded via the following link:

About EDHEC-Risk Institute
Since 2001, EDHEC has been pursuing an ambitious policy in terms of international research. This policy, known as “Research for Business”, aims to make EDHEC an academic institution of reference for the industry in a small number of areas in which the school has reached critical mass in terms of expertise and research results. Among these areas, asset and risk management have occupied privileged positions, leading to the creation in 2001 of a major research facility: EDHEC-Risk Institute. This institute now boasts a team of 80 permanent professors, engineers and support staff, as well as 18 research associates from the financial industry and 6 affiliate professors. EDHEC-Risk Institute is located at campuses in Singapore, which was established at the invitation of the Monetary Authority of Singapore (MAS), the City of London in the United Kingdom, and Nice, France. In addition, it has a research team located in the United States. The philosophy of the institute is to validate its work by publication in prestigious academic journals, but also to make it available to professionals and to participate in industry debate through its Position Papers, published studies and conferences. Each year, EDHEC-Risk organises two conferences for professionals in order to present the results of its research, one in London (EDHEC-Risk Days – Europe) and one in Singapore (EDHEC-Risk Days – Asia), attracting more than 2,000 professional delegates.

To ensure the distribution of its research to the industry, EDHEC-Risk also provides professionals with access to its website,, which is entirely devoted to international risk and asset management research. The website, which has more than 50,000 regular visitors, is aimed at professionals who wish to benefit from EDHEC-Risk’s analysis and expertise in the area of applied portfolio management research. Its monthly newsletter is distributed to more than 1,000,000 readers. EDHEC-Risk Institute also has highly significant executive education activities for professionals. In partnership with CFA Institute, it has developed advanced seminars based on its research which are available to CFA charterholders and have been taking place since 2008 in New York, Singapore and London. EDHEC-Risk Institute has an original PhD in Finance programme which, in addition to its highly selective residential track for young talents worldwide, has an executive track for high level professionals who already have masters degrees from prestigious universities and significant industry experience. Complementing the core faculty, this unique PhD in Finance programme has highly prestigious affiliate faculty from universities such as Princeton, Wharton, Oxford, Chicago and CalTech.

About Eurex Exchange
Eurex Exchange is one of the world’s leading derivatives exchanges, serving a growing global distribution network. It offers more than 1,700 products covering all major as well as alternative asset classes. Our marketplace – based on innovative IT infrastructure – is gateway to the most heavily traded euro denominated equity index and fixed income derivatives.
As part of Eurex Group, we provide access to a global liquidity network with daily trading volumes exceeding 10 million contracts in 2011 together with the International Securities Exchange and the European Energy Exchange. Eurex Exchange uses Eurex Clearing, one of the leading central counterparties globally.
Find out more at
Eurex Group is comprised of Eurex Exchange, the International Securities Exchange, the European Energy Exchange, Eurex Clearing, Eurex Bonds and Eurex Repo.
Eurex Group is owned by Deutsche Börse AG (Xetra: DB1).

Jeudi 7 Juin 2012

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