The latest edition of Fulcrum’s Alternative View looks at the volatility risk premium.
- As with many other alternative risk premia, the volatility risk premium has been persistent over time within global financial markets. It is associated with the tendency for implied volatility to be higher than the volatility that is subsequently realised on the underlying asset, and rightly draws comparisons to other forms of insurance provision, such as household or car insurance, where the seller of the insurance receives a premium as compensation for taking on the risk. Selling volatility on an equity index has been widely used as an investment strategy and can provide investors with a returns stream that is attractive and diversifying. But the premium does not have to be contained to equities. The paper looks at the volatility premium itself and its application within equities, before extending the premium’s purview across asset classes to understand how this may benefit investors