The Volatility Risk Premium (VRP) is one of the most persistent alternative risk premiums, extractable from multiple asset classes over time. The benefits of exposure to the VRP are well known, particularly post periods of extreme market volatility. Investor concern is rightly focused around performance during periods of extreme volatility, so called “left tail” or “Black Swan” events.
In this paper, we analyse the performance of a widely employed, systematic S&P 500 VRP strategy during all quarters of negative equity performance since 1996. Only in 40% of these negative equity quarters does the VRP strategy exhibit negative performance. Further, in these instances, the drawdown is both significantly smaller than that of the equity index and the recovery of lost capital significantly faster. The analysis is then extended to include the VRP across multiple asset classes.
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