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Investing Research Articles

1118 Research Articles

The Why of the Volatility Risk Premium

…modeling suggests that sharp jumps in stock market volatility drive investors to overprice some equity index options, most consistently out-of-the-money put options.

Correlation Variability as Driver of the Volatility Risk Premium

…evidence suggests that equity index options carry a price premium because of their value in hedging against shocks to return correlations among individual stocks. Options for individual stocks do not carry this premium.

The Volatility Risk Premium and De-biased Equity Option Returns

…speculators may be able to exploit the volatility risk premium by selling short-term deep out-of-the-money put options and all maturities of deep out-of-the-money call options on the broad stock market, especially during periods of high volatility.

Volatility Risk Premium an Exploitable Stock Market Predictor?

Does the U.S. stock market volatility risk premium (VRP), measured as the difference between the volatility implied by stock index option prices recent actual index volatility, usefully predict stock market returns? To investigate, we consider a simple VRP specification: S&P 500 Implied Volatility Index (VIX) minus standard deviation of daily S&P 500 Index returns over the past 21 trading days…. Keep Reading

Using SVXY to Capture the Volatility Risk Premium

In response to “Shorting VXX with Crash Protection”, which investigates shorting iPath S&P 500 VIX Short-Term Futures (VXX) to capture the equity volatility risk premium, a subscriber asked about instead using a long position in ProShares Short VIX Short-Term Futures (SVXY). To investigate, we consider two scenarios based on monthly measurements: Buy and Hold –… Keep Reading

Triumph of the Optimists (Chapter-by-Chapter Review)

…21st-century investors should curb their exuberance.

Best Equity Risk Premium

What are the different ways of estimating the equity risk premium, and which one is best? In the March 2024 update of his paper entitled “Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2024 Edition”, Aswath Damodaran updates a comprehensive overview of equity risk premium estimation. He examines why different approaches to estimating… Keep Reading

Simple, Practical Test of VRP as IEF Return Predictor

“Equity Market and Treasuries Variance Risk Premiums as Return Predictors” reports a finding, among others, that the variance risk premium for 10-year U.S. Treasury notes (T-note) predicts near-term returns for those notes (as manifested via futures). However, the methods used to calculate the variance risk premium are complex. Is there a simple way to exploit the… Keep Reading

Dissecting the Equity Market Variance Risk Premium

Is there a more precise way to measure the premium available to investors willing to bear volatility risk than overall return variance? In their January 2015 paper entitled “Downside Variance Risk Premium”, Bruno Feunou, Mohammad Jahan-Parvar and Cedric Okou investigate the usefulness of  (1) decomposing the variance risk premium (the difference between option-implied and realized variance)… Keep Reading

Fear of Disasters?

…evidence suggests that fear of disasters accounts for large fractions, perhaps most on average, of both the equity risk premium and the volatility risk premium.