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Implied Volatility Modelling, Tail Risk Premia, and Volatility Arbitrage Strategies

Abstract : Volatility strategies have flourished since the Great Financial Crisis in 2008. Nevertheless, the recent catastrophic performance of such exchange-traded products has put into question their contributions for portfolio hedging and diversification. My thesis work aims to rethink and reinvent the philosophy of volatility strategies.From a preliminary empirical study based on the expected utility theory, Chapter 1 makes a diagnostic of traditional volatility strategies, based on buy-and-hold investments and passive replication of implied volatility. It exhibits that, although such portfolio hedging significantly outperforms traditional hedging, it appears strongly inappropriate for risk-loving investors.Chapter 2 paves the way for a new generation of volatility strategies, active, option-based and factor-based investing. Indeed, our both analytical and empirical decomposition of implied volatility smiles into a combination of implied risk premia, distinct and tradeable, enables to harvest actively the compensation for bearing higher-order risks. These insurance risk premia measure the pricing discrepanciesbetween the risk-neutral and the physical probability distributions.Finally, Chapter 3 compares our factor-based investing approach to the strategies usually employed in the hedge fund universe. Our essay clearly evidences that our tail risk premia strategies are incremental determinants in the hedge fund performance, in both the time-series and the cross-section of returns. Hence, we exhibit to what extent hedge fund alpha actually arises from selling crash insurance strategies against tail risks.
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Submitted on : Monday, June 18, 2018 - 4:44:06 PM
Last modification on : Wednesday, October 14, 2020 - 4:12:41 AM
Long-term archiving on: : Tuesday, September 25, 2018 - 10:48:26 AM


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  • HAL Id : tel-01818099, version 1



Anmar Al Wakil. Implied Volatility Modelling, Tail Risk Premia, and Volatility Arbitrage Strategies. Business administration. Université Paris sciences et lettres, 2017. English. ⟨NNT : 2017PSLED047⟩. ⟨tel-01818099⟩



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