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Equity portfolio trading with volatility and dividend derivatives
In this article, I investigate trading strategies for equity portfolio analysis that considers diversification using dividend derivatives. The equity portfolio is assumed to be perfectly or highly correlated with the Euro STOXX 50® Index. The strategy employing dividend derivatives for hedging is compared with the more common strategy based on using VSTOXX® derivatives. I highlight that hedging with dividend derivatives offers a viable and possibly superior long-term alternative for hedging equity portfolios with stock index derivatives. In addition, I show that ATM volatility options could have been used successfully to hedge equity tail risk associated with the Brexit event in 2016 that caused a 9% drop in the Euro STOXX 50 immediately after the vote.
History
Publication status
- Published
File Version
- Accepted version
Journal
Journal of DerivativesISSN
1074-1240Publisher
Pageant Media LtdExternal DOI
Issue
3Volume
29Page range
46-64Department affiliated with
- Accounting and Finance Publications
Full text available
- No
Peer reviewed?
- Yes
Legacy Posted Date
2022-03-25First Compliant Deposit (FCD) Date
2022-03-25Usage metrics
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