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The Journal of Alternative Investments

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VIX Futures and options: A Case Study of Portfolio Diversification During the 2008 Financial Crisis

Edward Szado
The Journal of Alternative Investments Fall 2009, 12 (2) 68-85; DOI: https://doi.org/10.3905/JAI.2009.12.2.068
Edward Szado
is a doctoral candidate at the Isenberg School of Management, and a research analyst at CISDM at the University of Massachusetts in Amherst, MA.
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  • For correspondence: eszado@som.umass.edu
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Abstract

In 2008, the S&P 500 experienced a drawdown of about 50% from peak to trough. Many assets which are typically considered effective equity diversifiers also faced precipitous losses. Most hedge fund strategies and commodity indices were not immune from declining. For example, the HFRX Global Hedge Fund Index had a maximum drawdown of approximately 25% of its value in 2008, with some of its sub-indexes dropping almost 60%. The drop in commodities was even more significant. The S&P GSCI commodity index experienced a maximum drawdown of about 2/3 of its value in 2008. In stark contrast, volatility levels as measured by VIX experienced significant increases and in 2008 repeatedly set new highs not seen since the crash of 1987. This study assesses the impact of a long VIX investment as a diversifier for a typical institutional investment portfolio during the 2008 credit crisis.

TOPICS: Mutual funds/passive investing/indexing, options, futures and forward contracts, financial crises and financial market history

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The Journal of Alternative Investments: 12 (2)
The Journal of Alternative Investments
Vol. 12, Issue 2
Fall 2009
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VIX Futures and options: A Case Study of Portfolio Diversification During the 2008 Financial Crisis
Edward Szado
The Journal of Alternative Investments Sep 2009, 12 (2) 68-85; DOI: 10.3905/JAI.2009.12.2.068

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VIX Futures and options: A Case Study of Portfolio Diversification During the 2008 Financial Crisis
Edward Szado
The Journal of Alternative Investments Sep 2009, 12 (2) 68-85; DOI: 10.3905/JAI.2009.12.2.068
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  • Article
    • Abstract
    • MOTIVATION
    • DATA
    • METHODOLOGY
    • VIX
    • RESULTS
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
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  • PDF (Subscribers Only)

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