Risk and Portfolio Construction

Understanding and Harnessing Volatility

16 of the best white papers on Volatility and the VIX

With the VIX recently trading above 15 on an intra-day basis, volatility is back on investors' minds. Below we've listed 16 recent papers on understanding, managing or harnessing equity market volatility.

Whether you're intrigued by the prospect of using VIX to gauge market sentiment and predict future investor behavior, curious about how volatility can be used to diagnose bubbles, or interested in how equity market volatility can be taken advantage of, there's sure to be a paper or two in here that you'll smile about.

Savvy Investor

A Practitioner’s Guide to Reading VIX® (S&P Dow Jones Indices, Dec 2017)
The meaning of a given VIX level is frequently misunderstood. This document is an introduction to some simple rules for market participants that could help to translate VIX levels into measures of market sentiment.

How to Harness Volatility to Unlock Alpha (Intech Investments)
(For compliance reasons, this paper is only accessible in North America, Europe and the Middle East)
Volatility is not only a source of risk, but can also be a source of alpha. Portfolios can be constructed with the excess growth rate in mind, so that systematic rebalancing both captures volatility and replenishes diversification.

Managing equity portfolio volatility by harnessing the volatility risk premium (Eaton Vance, May 2017)
(For compliance reasons, this paper is only accessible in the USA and Canada)
After recent gains, many investors are tempering return expectations and focusing on how best to achieve equity-like returns with less risk. One relatively new solution is the use of Volatility Risk Premium option-based strategies.

Taxonomy of Global Risk, Uncertainty, and Volatility Measures (US Federal Reserve, 2017)
Researchers at the US Fed attempt to categorize risk and uncertainty measures, as they often differ across multiple dimensions, including the method of calculation, the underlying outcome, and the horizon at which they are calculated.

Coping with Chaos: Adding Value with Options Strategies (Invesco, Aug 2017)
(For compliance reasons, this paper is only accessible in certain geographies)
Financial market prices exhibit chaotic characteristics, but they are not continuously chaotic. Invesco's Global Targeted Returns team speaks on adding value by coping with chaotic times and behavioural biases in financial markets.

Can We Use Volatility to Diagnose Financial Bubbles? Lessons from 40 Historical Bubbles (ETH Zurich, 2017)
Pre-bubble, bubble, and post-bubble volatility is examined across 40 well-known market bubbles to check whether volatility could be considered an early warning signal of a coming crash. The results are interestingly apt.

New Risk Metrics for a New World (Swan Global Investments, 2018)
The Financial Crisis of 2007-09 spawned many new alternative investment products purported to have low correlations and minimal risk, but how should these funds be benchmarking performance and measuring relative riskiness?

Forecasting a Volatility Tsunami (Andrew Thrasher, 2017)
This paper demonstrates that the dispersion of the Volatility Index acts as a better predictor of its future VIX spikes. 

Reading VIX®: Does VIX Predict Future Volatility (S&P Dow Jones Indices, Nov 2017)
The purpose of this paper is to provide without requiring a prior knowledge of the sophisticated mathematics involved in option pricing — a guide to interpreting what is, and what is not, indicated by VIX.

Manipulation in the VIX? (2017)
John M. Griffin and Amin Shams of the University of Texas at Austin, Department of Finance examine SPX options, and whether market manipulation exists in SPX options used to calculate VIX levels.

Time Diversification Redux: Why Volatility varies with the holding period (Research Affiliates, 2017)
Investing is traditionally thought of as a trade-off between the risk and reward (portfolio returns), but modern risk measures can make the definition of investment risk mysterious and complex.

The Art and Science of Volatility Prediction (Lazard)
Volatility has effectively become the expected price of uncertainty in markets, and (to a large extent) it can be forecasted, given certain statistical properties.

Covering the World: Global Evidence on Covered Calls (AQR Capital Management, 2017)
Typical covered call strategies can be deconstructed into three components - equity exposure, equity timing, and short volatility exposure. This paper looks at covered calls on 11 global indexes, applying the same type of attribution methodology.

The Global Risks Report 2018 (World Economic Forum)
The World Economic Forum's Global Risks Report contains topics including: Future Shocks, Hindsight and Risk Reassessment. This document is a comprehensive assessment of geopolitical and market-related risks of global relevance.

The Vanishing VIX: Implications of Low Vol on the Market and the DRS (Swan Global Investments, 2017)
This paper explores financial market changes that impact the Defined Risk Strategy (DRS). It discusses new financial concepts and theories and focuses mostly on volatility related matters and their impact on the DRS.

Toward Dynamic Stress Tests (Axioma, Nov 2017)
This quant paper by Axioma discusses one of the techniques used to enhance stress tests: using statistics for identifying different regimes, and then adjusting the impact of each regime upon the stress test.

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