Practical analysis for investment professionals
18 February 2016

Volatility Premiums in Institutional Investment Portfolios

Posted In: Economics

Volatility Premiums in Institutional Investment Portfolios

One of the key goals of quantitative asset allocation research is to identify novel risk premiums that augment and diversify the set of usable assets available to institutions in designing their strategic benchmark investment policies. So William Fallon, James Park, and Danny Yu set about investigating the role of volatility premiums in institutional investment portfolios. Their simulations showed that modest allocations to short volatility exposure have the potential to enhance long-term returns.

Their research and conclusions are published in “Asset Allocation Implications of the Global Volatility Premium” in the September/October 2015 issue of the Financial Analysts Journal. I got the chance to talk with Fallon about his team’s work as part of our ongoing FAJ author interview series.



Fallon says that their “research agenda was pragmatic” and came about after conversations with clients who requested “additional primary exposures and new building blocks for use in their strategic risk budgeting and portfolio construction.” They cast a wide net, initially, and eventually “settled on a strategy that sells volatility systematically.” “In its purest form,” Fallon told me, “this strategy makes money when realized volatility comes in lower than implied.”

To hear Fallon explain the intricacies and pitfalls of such a strategy, listen to the full interview above or download the MP3. CFA Institute members and subscribers can read the full article on the CFA Institute Publications website at cfapubs.org.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/johnnorth

About the Author(s)
Pat Light

Pat Light was an assistant editor at CFA Institute. Before joining the CFA Institute editorial staff, he worked as a teacher. Light has a bachelor's degree in English from Duke University.

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