Embracing Downside Risk
| Autor: | Lars N. Nielsen, Roni Israelov, Daniel Villalon |
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| Rok vydání: | 2016 |
| Předmět: | |
| Zdroj: | The Journal of Alternative Investments. 19:59-67 |
| ISSN: | 2168-8435 1520-3255 |
| DOI: | 10.3905/jai.2017.19.3.059 |
| Popis: | It is well known that investors have asymmetric risk preferences when it comes to bearing downside risk versus participating in the upside. Options markets provide a useful and intuitive way to quantify these asymmetric preferences by way of the returns associated with being on either side. The authors show this using equity index options and find that most of the empirical equity risk premium reflects compensation for downside risk—in fact, upside participation earned little reward in the long run, reflecting an extreme asymmetry that might be surprising to some investors. The analysis is extended to other asset classes to show similar (albeit in some cases weaker) results. Data and economic theory suggest that investors who attempt to deal with downside risk by being long options should expect to underperform. |
| Databáze: | OpenAIRE |
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