Authors:
Sylvestre Blanc
1
;
Emmanuel Fragnière
2
;
Francesc Naya
3
and
Nils Tuchschmid
3
Affiliations:
1
Grammont Finance, Derivatives and Portfolio Management, Switzerland
;
2
HES-SO Valais-Wallis, Business School, ITO, Sierre, Switzerland
;
3
HES-SO School of Management Fribourg, Fribourg, Switzerland
Keyword(s):
Backward-Looking Signals, Financial Safety, Forward-Looking Signals, Portfolio Insurance, Options, Portfolio Optimization.
Abstract:
Our research uses options to safeguard equity portfolios from downside risk. Despite the cost challenges of passive put protection, we explore leveraging diverse market signals, backward and forward-looking ones, to enhance portfolio risk-return balance while maintaining acceptable safeguards. These signals aid in selecting underlying assets for option positions, aiming to achieve protection while minimizing put premium expenditure. Certain signals, like "trend" or "low volatility”, either empirical or implied, demonstrate added value, although their effectiveness depends on market conditions (or regimes). We also evaluate whether a set of trading rules can enhance the efficiency of such strategies. Our study highlights the importance of financial product safety, akin to safety measures for industrial products. By doing so, we underline the importance of portfolio insurance in finance. Further developments will aim at implementing a trading system that offers greater adaptability to
different market regimes, for example high volatility phases, and under real market conditions.
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