TAIL RISK HEDGING: Creating Robust Portfolios for Volatile Markets by Vineer Bha

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Using empirical data and charts, this book explains the consequences of diversification failure in tail events and how to manage portfolios when this happens. It provides an easy-to-use, yet rigorous framework for protecting investment portfolios against tail risk and using tail hedging to play offense.

FORMATHardcover LANGUAGEEnglish CONDITIONBrand New Publisher Description

"TAIL RISKS" originate from the failure of mean reversion and the idealized bell curve of asset returns, which assumes that highly probable outcomes occur near the center of the curve and that unlikely occurrences, good and bad, happen rarely, if at all, at either "tail" of the curve. Ever since the global financial crisis, protecting investments against these severe tail events has become a priority for investors and money managers, but it issomething Vineer Bhansali and his team at PIMCO have been doing for over a decade. In one of the first comprehensive and rigorous books ever written on tail risk hedging, he lays out a systematic approach to protecting portfolios from, and potentially benefiting from, rare yet severe market outcomes.Tail Risk Hedging is built on the author'spractical experience applying macroeconomic forecasting and quantitative modeling techniques across asset markets. Using empirical data and charts, he explains the consequences of diversification failure in tail events andhow to manage portfolios when this happens. He provides an easy-to-use, yet rigorous framework for protecting investment portfolios against tail risk and using tail hedging to play offense. Tail Risk Hedging exploreshow to:Generate profits from volatility and illiquidity during tail-risk events in equity and credit marketsBuy attractively priced tail hedges that add value to a portfolio and quantify basis riskInterpret the psychology of investors in option pricing and portfolio constructionCustomize explicit hedges for retirement investmentsHedge risk factors such as duration risk and inflation riskManaging tail risk is today's most significant development in risk management, and this thorough guide helps you access every aspect of it. With the time-tested and mathematically rigorous strategies described here, including pieces of computer code, you get access to insights to help mitigate portfolio losses in significant downturns, create explosive liquidity while unhedged participants are forced to sell, and create more aggressive yet tail-risk-focused portfolios. The book also gives you a unique, higher level view of how tail risk is related to investing in alternatives, and of derivatives such as zerocost collars and variance swaps. Volatilityand tail risks are here to stay, and so should your clients' wealth when you use Tail Risk Hedging for managing portfolios.PRAISE FOR TAIL RISK HEDGING:"Managing, mitigating, and even exploiting the risk of bad times are the most important concerns in investments. Bhansali puts tail risk hedging and tail risk management under a microscope--pricing, implementation, and showing how we can fine-tune our risk exposures, which are all crucial ways in how we can better weather our bad times." -- ANDREW ANG, Ann F. Kaplan Professor of Business at Columbia University"This book is critical and accessible reading for fiduciaries, financial consultants and investors interested in both theoretical foundations and practical considerations for how to frame hedging downside risk in portfolios. It is a tremendous resource for anyoneinvolved in asset allocation today." -- CHRISTOPHER C. GECZY, Ph.D., Academic Director, Wharton Wealth Management Initiative and Adj. Associate Professor of Finance, The Wharton School"Bhansali's book demonstrates how tail risk hedging can work, be concretely implemented, and lead to higher returns so that it is possible to have your cake and eat it too! A must read for the savvy investor." -- DIDIER SORNETTE, Professor on the Chair of Entrepreneurial Risks, ETH Zurich

Back Cover

Investors know that just one severe market shock may be terminal for a financial plan. To retain a portfolio's hard-won value, asset managers need to supplement traditional risk management paradigms with a forward-thinking, "just-in-case" strategy. The answer is TailRisk Hedging . No one is better qualified to offer this first authoritative and rigorous coverage of hedging against tail risks than Vineer Bhansali. A master of implementing theory into practice, he shares strategies, frameworks, and formulas for managing portfolios hedged against tailrisk. He gives you the tools and the foundations you need to manage your clients' wealth against market disasters, including: AN INSIDER'S LOOK AT PIMCO'S RISK FACTOR APPROACH TO FORWARD-LOOKING INVESTMENT DEVELOPMENT AND PORTFOLIO CONSTRUCTION UNIQUE INSIGHTS AND FRAMEWORKS NOT BROADLY WRITTEN ABOUT IN THE FIELD OR ACADEMIA ANALYSIS OF THE MAJOR BEHAVIORAL PHENOMENA IN THE MARKETS AND THEIR RELEVANCE FOR TAIL HEDGING

Author Biography

VINEER BHANSALI, PH.D., is a managing director and portfolio manager in the Newport Beach office of PIMCO, where he oversees the company's quantitativeinvestment portfolios.

Table of Contents

Foreword by Mohamed El-Erian xiIntroduction xvAcknowledgments xixChapter 1: Introduction to Tail Risk and TailRisk Management 1Lessons Learned 1Distressed Liquidation and Failure of Diversification 18Chapter 2: Basics- Tail Risk Hedging for Defense 25Formal Derivation of Portfolio Hedges Using Factor Hedges 30Rolling Tail Hedges 32Benchmarking Tail Risk Management 37Cash Versus Explicit Tail Hedging 43Chapter 3 Offensive Tail Risk Hedging 51A Model to Compute the Value of Tail Hedging 56Model Calibration 57Chapter 4: Active Tail Risk Management 71Creating a Long History 78Active Monetization Rules 84Chapter 5: Indirect Hedging and Basis Risk 93Quantifying Basis Risk 95Hedge Matching at the Attachment Point 98"Soft" Indirects: Comparing Puts versus Put Spreads 104Basis Risk from Correlated Asset Classes 107Chapter 6: Other Tail Risk Management Strategies 129Tail Risk Hedging versus Asset Allocation in a Multimodal World 129The Hedging Value in Trends and Momentum 134A Look at the Risks and Rewards of Costless Collars 138Variance Swaps and Direct Volatility-Based Hedging 141Dynamic Hedging 146Chapter 7: A Behavioral Perspective on Tail Risk Hedging 153Narrow Framing and Tail Risk Hedging 154Pricing of Put Options on a Standalone Basis 161Multiple Equilibria and Expected Returns on Tail Hedges 165Precommitment and Procyclicality 169Chapter 8: Tail Risk Hedging for Retirement Investments 179Chapter 9: Inflation and Duration Tail Risk Hedging 193Hedging at the Money Inflation versus Inflation Tails 195Tail Hedging Realized Inflation versus Inflation Expectations 198Inflation Dynamics and Inflation Spikes 202Framework for Inflation Tail Hedging 210Benchmarking Inflation Tail Hedges 211Pricing of Inflation Options 212Options on CPI 212Options on the Breakeven Inflation Rate 215Indirect Inflation Tail Risk Hedging and Basis Risk 217Pricing of Tail Interest-Rate Swaptions 219Indirect Hedges 221Example of Gold Options as Proxy Tail Hedge 222Notes 225Bibliography 231Index 235

Details ISBN0071791752 Author Vineer Bhansali Publisher McGraw-Hill Education - Europe ISBN-10 0071791752 ISBN-13 9780071791755 Format Hardcover Imprint McGraw-Hill Professional Country of Publication United States DEWEY 332.64524 Language English Media Book Residence New York, NY, US Short Title TAIL RISK HEDGING Series Professional Finance & Investment Year 2014 Pages 272 UK Release Date 2014-02-16 Publication Date 2014-02-16 AU Release Date 2014-02-16 NZ Release Date 2014-02-16 US Release Date 2014-02-16 Audience Professional & Vocational Illustrations 20 Illustrations We've got this

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