Advertisement

Tail Risk Hedging: It Is an Asset Allocation Decision

  • Elisabetta Basilico
  • Tommi Johnsen
Chapter
  • 97 Downloads

Abstract

Tail risk hedging gained traction after the global financial crisis (GFC) of 2008–2009 and has grown ever since. October 2008 was the second worst month for the SP500 since the mid-1980s and global investors still bear the scars of the wealth destruction possible during tail events. At the time of this writing,2 the topic is again on the tip of the tongue of every asset allocator, investor and money manager. In fact, after witnessing the second largest bull market since 1932,3 which started in March 2009 (See Fig. 6.1), the month of December 2018 proved to be a challenging one (−9,17% for the month) for investors.

Bibliography

  1. Asvanunt, A., L.N. Nielsen, and Daniel Villalon. 2015. Working Your Tail Off: Active Strategies Versus Direct Hedging. The Journal of Investing 24 (Summer): 134–146.CrossRefGoogle Scholar
  2. Bhansali, V. 2008. Tail Risk Management. The Journal of Portfolio Management 34: 68–75.CrossRefGoogle Scholar
  3. Bhansali,V., and J.M. Davis 2010a. Offensive Risk Management: Can Tail Risk Hedging Be Profitable. PIMCO White PaperGoogle Scholar
  4. Bhansali, V., and J.M. Davis. 2010b. Offensive Risk Management II: The Case for Active Tail Hedging. The Journal of Portfolio Management 37: 78–91.CrossRefGoogle Scholar
  5. Ilmanen, A. 2012. Do Financial Markets Reward Buying or Selling Insurance and Lottery Tickets? Financial Analyst Journal 68: 26–36.CrossRefGoogle Scholar
  6. Israelov, R. 2019. Pathetic Protection: The Elusive Benefits of Protective Puts. Journal of Alternative Investing 21: 6–33.Google Scholar
  7. Israelov, R., L.N. Nielsen, and Daniel Villalon. 2017. Embracing Downside Risk. Journal of Alternative Investments 19: 59–67.Google Scholar
  8. Litterman, R. 2011. Who Should Hedge Tail Risk? Financial Analyst Journal 67: 6–11.CrossRefGoogle Scholar
  9. Taleb, N.N. 2004. Fooled by Randomness: The Hidden Role of Chance in Life and Markets. New York: Thompson Texere.Google Scholar
  10. ———. 2013. Do Financial Markets Reward Buying or Selling Insurance and Lottery Tickets: A Comment. Financial Analyst Journal 69: 17–19.CrossRefGoogle Scholar
  11. Thiagarajan, S.R., A. Alankar, and Rustem Shaikhutdinov. 2015. Tail Risk: Challenges, Mitigation, and Research Opportunities. The Journal of Investing 24 (Summer): 113–121.CrossRefGoogle Scholar

Copyright information

© The Author(s) 2019

Authors and Affiliations

  • Elisabetta Basilico
    • 1
  • Tommi Johnsen
    • 2
  1. 1.Applied Quantitative Analysis LLCDenverUSA
  2. 2.Reiman School of FinanceUniversity of DenverDenverUSA

Personalised recommendations