Please use this identifier to cite or link to this item:
http://arks.princeton.edu/ark:/88435/dsp01p2676z29w
Title: | Volatility-of-Volatility: Dynamic Models and Hedging Strategies |
Authors: | Jalota, Aryaman |
Advisors: | Sircar, Ronnie |
Department: | Operations Research and Financial Engineering |
Certificate Program: | Finance Program |
Class Year: | 2018 |
Abstract: | In this thesis, volatility-of-volatility, as measured by the VVIX Index, is studied as an independent risk-factor for investors. A statistical study of the VVIX time series indicates that, like the well-studied VIX, it exhibits properties of stationarity, mean-reversion, and strong autocorrelation. Further, several stochastic volatility models are tested using Generalized Method of Moments (GMM) in their abilities to explain the behavior of the VVIX. The 3/2-model is found to best fit the VVIX data, a result that is further validated by a simulation-based robustness test. Further, motivated by the recent literature on volatility-of-volatility, the predictability of the VVIX on tail risk hedging returns is explored. After constructing a tail risk hedging portfolio using delta-hedged VIX calls, a vol-of-vol hedging strategy is constructed by exploiting the negative risk-premia predicted by the VVIX. It is found that applying the vol-of-vol hedge significantly improves risk-adjusted returns of a market portfolio, as measured by Sharpe and Sortino ratios, in the period of study. Moreover, it is shown that vol-of-vol-based tail risk hedging is more effective than volatility-driven tail risk hedging when the instruments of choice are VIX calls. |
URI: | http://arks.princeton.edu/ark:/88435/dsp01p2676z29w |
Type of Material: | Princeton University Senior Theses |
Language: | en |
Appears in Collections: | Operations Research and Financial Engineering, 2000-2020 |
Files in This Item:
File | Description | Size | Format | |
---|---|---|---|---|
JALOTA-ARYAMAN-THESIS.pdf | 1.93 MB | Adobe PDF | Request a copy |
Items in Dataspace are protected by copyright, with all rights reserved, unless otherwise indicated.