Hedging Equity Exposures

This paper evaluates several commonly used strategies to hedge tail risks in equity portfolios. It concludes that most of these options are expensive to implement. Much like insurance, the implementation of tail hedges cannot be timed, and their costs make it difficult for investors to sustain them over the long-term. The paper proposes the use of a mix of realized and implied volatilities as a tail hedge, and demonstrates that this mix is significantly more cost effective than other option strategies.

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