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- Title
How Should the Long-Term Investor Harvest Variance Risk Premiums?
- Authors
Dörries, Julian; Korn, Olaf; Power, Gabriel J.
- Abstract
Derivatives strategies that aim to earn variance risk premiums are exposed to sharp price declines during market crises, calling into question their suitability for the long-term investor. This article defines, analyzes, and proposes potential solutions to three problems (payoff, leverage, and finite maturity) linked to designing suitable variance-based investment strategies. The authors conduct an empirical study of such strategies for the S&P 500 Index options market and find strong effects of certain design elements on risk and return. Overall, the results show that variance strategies can be attractive to the long-term investor if properly designed.
- Subjects
OPTIONS (Finance); RISK premiums; INVESTMENT policy; PRICES
- Publication
Journal of Portfolio Management, 2024, Vol 50, Issue 6, p122
- ISSN
0095-4918
- Publication type
Article
- DOI
10.3905/jpm.2024.1.600