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Returns to tail hedging

Author

Listed:
  • Bell, Peter N

Abstract

Tail hedging is a portfolio management strategy meant to reduce the risk of large losses. For an investor who holds a stock market index fund, the strategy entails buying out of the money put options on the index. Research suggests the strategy works well in practice and I explore the returns to tail hedging in a simple theoretical model. I calculate descriptive statistics for the returns to tail hedging when the stock price has either a normal or fat tailed distribution. I find that tail hedging is rewarding when stock prices have fat tails.

Suggested Citation

  • Bell, Peter N, 2015. "Returns to tail hedging," MPRA Paper 62160, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:62160
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    More about this item

    Keywords

    Portfolio management; tail option; fat tail; simulation.;
    All these keywords.

    JEL classification:

    • B50 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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