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Pierre Moulin - One of the best experts on this subject based on the ideXlab platform.
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inter temporal risk parity a constant Volatility Framework for factor investing
2014Co-Authors: Romain Perchet, Raul Leote De Carvalho, Pierre MoulinAbstract:Inter-temporal risk parity is a strategy that rebalances risky assets and cash in order to target a constant level of ex-ante risk over time. When applied to equities and compared to a buy-and-hold portfolio it is known to improve the Sharpe ratio and reduce drawdowns. We apply inter-temporal risk parity strategies to factor investing, namely value and momentum investing in equities, government bonds and foreign exchange. Value and momentum factors generate a premium which is traditionally captured by dollar-neutral long-short portfolios rebalanced every month to take into account changes in stock factor exposures and keep leverage constant. An inter-temporal risk parity strategy re-balances the portfolio to the level of leverage required to target a constant ex-ante risk over time. Value and momentum risk-adjusted premiums increase, sometimes significantly, when an inter-temporal risk parity strategy is applied. Volatility clustering and fat tails are behind this improvement of risk-adjusted premiums. Drawdowns are, however, not smoothed when applying the strategy to factor investing. The benefits of the inter-temporal risk parity strategy are more important for equity and foreign-exchange factors, with the strongest Volatility clustering and fat tails. For government bond factors, with little Volatility clustering, the benefits of the strategy appear less significant.
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inter temporal risk parity a constant Volatility Framework for equities and other asset classes
2014Co-Authors: Romain Perchet, Raul Leote De Carvalho, Thomas Heckel, Pierre MoulinAbstract:Inter-temporal risk parity is a strategy which rebalances between a risky asset and cash in order to target a constant level of risk over time. When applied to equities and compared to a buy and hold strategy it is known to improve the Sharpe ratio and reduce drawdowns. We used Monte Carlo simulations based on a number of time series parametric models from the GARCH family in order to analyze the relative importance of a number of effects in explaining those benefits. We found that Volatility clustering with constant returns and the fat tails are the two effects with the largest explanatory power. The results are even stronger if there is a negative relationship between return and Volatility. On the other hand, if the Sharpe ratio remains constant over time, the only benefit would arise from an inter-temporal risk diversification effect which is small and has a negligible contribution. Using historical data, we also simulated what would have been the performance of the strategy when applied to equities, corporate bonds, government bonds and commodities. We found that the benefits of the strategy are more important for equities and high yield corporate bonds, which show the strongest Volatility clustering and fat tails. For government bonds and investment grade bonds, which show little Volatility clustering, the benefits of the strategy have been less important.
Romain Perchet - One of the best experts on this subject based on the ideXlab platform.
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inter temporal risk parity a constant Volatility Framework for equities and other asset classes
2015Co-Authors: Romain PerchetAbstract:Inter-temporal risk parity is a strategy which rebalances between a risky asset and cash in order to target a constant level of risk over time. When applied to equities and compared to a buy-and-hold strategy it is known to improve the Sharpe ratio and reduce drawdowns. We used Monte Carlo simulations based on a number of time-series parametric models from the GARCH family in order to analyze the relative importance of a number of effects in explaining those benefits. We found that Volatility clustering and fat tails in return distributions are the two effects with the largest explanatory power. The results are even stronger when there is a negative relationship between return and Volatility. The application of a hidden Markow model to the historical time series of returns revealed Volatility clustering and a negative correlation between returns and Volatility, not only in equities but also to some extent in corporate bonds, government bonds and commodities. We used historical returns to simulate what the performance of an inter-temporal risk parity strategy would have been when applied to equities, corporate bonds, government bonds and commodities. The benefits of the strategy are more significant for equities and high-yield corporate bonds, which show the strongest Volatility clustering, fat tails and negative relationship between returns and Volatility. For government bonds and investment-grade bonds, which show less Volatility clustering and a weaker negative relationship between returns and Volatility, the benefits of the strategy were less marked.
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inter temporal risk parity a constant Volatility Framework for factor investing
2014Co-Authors: Romain Perchet, Raul Leote De Carvalho, Pierre MoulinAbstract:Inter-temporal risk parity is a strategy that rebalances risky assets and cash in order to target a constant level of ex-ante risk over time. When applied to equities and compared to a buy-and-hold portfolio it is known to improve the Sharpe ratio and reduce drawdowns. We apply inter-temporal risk parity strategies to factor investing, namely value and momentum investing in equities, government bonds and foreign exchange. Value and momentum factors generate a premium which is traditionally captured by dollar-neutral long-short portfolios rebalanced every month to take into account changes in stock factor exposures and keep leverage constant. An inter-temporal risk parity strategy re-balances the portfolio to the level of leverage required to target a constant ex-ante risk over time. Value and momentum risk-adjusted premiums increase, sometimes significantly, when an inter-temporal risk parity strategy is applied. Volatility clustering and fat tails are behind this improvement of risk-adjusted premiums. Drawdowns are, however, not smoothed when applying the strategy to factor investing. The benefits of the inter-temporal risk parity strategy are more important for equity and foreign-exchange factors, with the strongest Volatility clustering and fat tails. For government bond factors, with little Volatility clustering, the benefits of the strategy appear less significant.
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inter temporal risk parity a constant Volatility Framework for equities and other asset classes
2014Co-Authors: Romain Perchet, Raul Leote De Carvalho, Thomas Heckel, Pierre MoulinAbstract:Inter-temporal risk parity is a strategy which rebalances between a risky asset and cash in order to target a constant level of risk over time. When applied to equities and compared to a buy and hold strategy it is known to improve the Sharpe ratio and reduce drawdowns. We used Monte Carlo simulations based on a number of time series parametric models from the GARCH family in order to analyze the relative importance of a number of effects in explaining those benefits. We found that Volatility clustering with constant returns and the fat tails are the two effects with the largest explanatory power. The results are even stronger if there is a negative relationship between return and Volatility. On the other hand, if the Sharpe ratio remains constant over time, the only benefit would arise from an inter-temporal risk diversification effect which is small and has a negligible contribution. Using historical data, we also simulated what would have been the performance of the strategy when applied to equities, corporate bonds, government bonds and commodities. We found that the benefits of the strategy are more important for equities and high yield corporate bonds, which show the strongest Volatility clustering and fat tails. For government bonds and investment grade bonds, which show little Volatility clustering, the benefits of the strategy have been less important.
Raul Leote De Carvalho - One of the best experts on this subject based on the ideXlab platform.
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inter temporal risk parity a constant Volatility Framework for factor investing
2014Co-Authors: Romain Perchet, Raul Leote De Carvalho, Pierre MoulinAbstract:Inter-temporal risk parity is a strategy that rebalances risky assets and cash in order to target a constant level of ex-ante risk over time. When applied to equities and compared to a buy-and-hold portfolio it is known to improve the Sharpe ratio and reduce drawdowns. We apply inter-temporal risk parity strategies to factor investing, namely value and momentum investing in equities, government bonds and foreign exchange. Value and momentum factors generate a premium which is traditionally captured by dollar-neutral long-short portfolios rebalanced every month to take into account changes in stock factor exposures and keep leverage constant. An inter-temporal risk parity strategy re-balances the portfolio to the level of leverage required to target a constant ex-ante risk over time. Value and momentum risk-adjusted premiums increase, sometimes significantly, when an inter-temporal risk parity strategy is applied. Volatility clustering and fat tails are behind this improvement of risk-adjusted premiums. Drawdowns are, however, not smoothed when applying the strategy to factor investing. The benefits of the inter-temporal risk parity strategy are more important for equity and foreign-exchange factors, with the strongest Volatility clustering and fat tails. For government bond factors, with little Volatility clustering, the benefits of the strategy appear less significant.
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inter temporal risk parity a constant Volatility Framework for equities and other asset classes
2014Co-Authors: Romain Perchet, Raul Leote De Carvalho, Thomas Heckel, Pierre MoulinAbstract:Inter-temporal risk parity is a strategy which rebalances between a risky asset and cash in order to target a constant level of risk over time. When applied to equities and compared to a buy and hold strategy it is known to improve the Sharpe ratio and reduce drawdowns. We used Monte Carlo simulations based on a number of time series parametric models from the GARCH family in order to analyze the relative importance of a number of effects in explaining those benefits. We found that Volatility clustering with constant returns and the fat tails are the two effects with the largest explanatory power. The results are even stronger if there is a negative relationship between return and Volatility. On the other hand, if the Sharpe ratio remains constant over time, the only benefit would arise from an inter-temporal risk diversification effect which is small and has a negligible contribution. Using historical data, we also simulated what would have been the performance of the strategy when applied to equities, corporate bonds, government bonds and commodities. We found that the benefits of the strategy are more important for equities and high yield corporate bonds, which show the strongest Volatility clustering and fat tails. For government bonds and investment grade bonds, which show little Volatility clustering, the benefits of the strategy have been less important.
Nikunj Kapadia - One of the best experts on this subject based on the ideXlab platform.
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delta hedged gains and the negative market Volatility risk premium
2003Co-Authors: Gurdip Bakshi, Nikunj KapadiaAbstract:We investigate whether the Volatility risk premium is negative by examining the statistical properties of delta-hedged option portfolios (buy the option and hedge with stock). Within a stochastic Volatility Framework, we demonstrate a correspondence between the sign and magnitude of the Volatility risk premium and the mean delta-hedged portfolio returns. Using a sample of S&P 500 index options, we provide empirical tests that have the following general results. First, the delta-hedged strategy underperforms zero. Second, the documented underperformance is less for options away from the money. Third, the underperformance is greater at times of higher Volatility. Fourth, the Volatility risk premium significantly affects delta-hedged gains, even after accounting for jump fears. Our evidence is supportive of a negative market Volatility risk premium. Copyright 2003, Oxford University Press.
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delta hedged gains and the negative market Volatility risk premium
2003Co-Authors: Gurdip Bakshi, Nikunj KapadiaAbstract:We investigate whether the Volatility risk premium is negative by examining the statistical properties of delta-hedged option portfolios (buy the option and hedge with stock). Within a stochastic Volatility Framework, we demonstrate a correspondence between the sign and magnitude of the Volatility risk premium and the mean delta-hedged portfolio returns. Using a sample of S&P 500 index options, we provide empirical tests that have the following general results. First, the delta-hedged strategy underperforms zero. Second, the documented underperformance is less for options away from the money. Third, the underperformance is greater at times of higher Volatility. Fourth, the Volatility risk premium significantly affects delta-hedged gains, even after accounting for jump fears. Our evidence is supportive of a negative market Volatility risk premium. The notion that Volatility of equity returns is stochastic has a firm footing in financial economics. However, a less than understood phenomenon is whether Volatility risk is compensated, and whether this compensation is higher or lower than the risk-free rate. Is the risk from changes in market Volatility positively correlated with the economy-wide pricing kernel process? If so, how does it affect the equity and option markets? Evidence that market Volatility risk premium may be nonzero can be motivated by three empirical findings: Purchased options are hedges against significant market declines. This is because increased realized Volatility coincides with downward market moves [French, Schwert, and Stambaugh (1987) and Glosten, Jagannathan,
Gurdip Bakshi - One of the best experts on this subject based on the ideXlab platform.
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delta hedged gains and the negative market Volatility risk premium
2003Co-Authors: Gurdip Bakshi, Nikunj KapadiaAbstract:We investigate whether the Volatility risk premium is negative by examining the statistical properties of delta-hedged option portfolios (buy the option and hedge with stock). Within a stochastic Volatility Framework, we demonstrate a correspondence between the sign and magnitude of the Volatility risk premium and the mean delta-hedged portfolio returns. Using a sample of S&P 500 index options, we provide empirical tests that have the following general results. First, the delta-hedged strategy underperforms zero. Second, the documented underperformance is less for options away from the money. Third, the underperformance is greater at times of higher Volatility. Fourth, the Volatility risk premium significantly affects delta-hedged gains, even after accounting for jump fears. Our evidence is supportive of a negative market Volatility risk premium. Copyright 2003, Oxford University Press.
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delta hedged gains and the negative market Volatility risk premium
2003Co-Authors: Gurdip Bakshi, Nikunj KapadiaAbstract:We investigate whether the Volatility risk premium is negative by examining the statistical properties of delta-hedged option portfolios (buy the option and hedge with stock). Within a stochastic Volatility Framework, we demonstrate a correspondence between the sign and magnitude of the Volatility risk premium and the mean delta-hedged portfolio returns. Using a sample of S&P 500 index options, we provide empirical tests that have the following general results. First, the delta-hedged strategy underperforms zero. Second, the documented underperformance is less for options away from the money. Third, the underperformance is greater at times of higher Volatility. Fourth, the Volatility risk premium significantly affects delta-hedged gains, even after accounting for jump fears. Our evidence is supportive of a negative market Volatility risk premium. The notion that Volatility of equity returns is stochastic has a firm footing in financial economics. However, a less than understood phenomenon is whether Volatility risk is compensated, and whether this compensation is higher or lower than the risk-free rate. Is the risk from changes in market Volatility positively correlated with the economy-wide pricing kernel process? If so, how does it affect the equity and option markets? Evidence that market Volatility risk premium may be nonzero can be motivated by three empirical findings: Purchased options are hedges against significant market declines. This is because increased realized Volatility coincides with downward market moves [French, Schwert, and Stambaugh (1987) and Glosten, Jagannathan,
