Munich Personal RePEc Archive

Returns to tail hedging

Bell, Peter N (2015): Returns to tail hedging.

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Abstract

Tail hedging is a portfolio management strategy meant to reduce the risk of large losses. For an investor who holds a stock market index fund, the strategy entails buying out of the money put options on the index. Research suggests the strategy works well in practice and I explore the returns to tail hedging in a simple theoretical model. I calculate descriptive statistics for the returns to tail hedging when the stock price has either a normal or fat tailed distribution. I find that tail hedging is rewarding when stock prices have fat tails.

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