Volatility as an Asset in Low Yield Investment Environment

Abstract

In  recent  years,  historically  low  levels  of  interest  rates  have  become  a  key  issue  for  many  investors. One of the alternatives in search for yield is the use of investment strategies based on volatility trading. A number of published studies show that options prices are consistently over-priced with respect to the realized volatility of the underlying assets, especially equity indices, which  creates  room  for  profits  through  the  use  of  options  and  other  investment  instruments.  Many studies, constructed indices, and actual portfolio performance based on the above principle demonstrate that room can be created for profitable investment strategies that is permanent and is based on economic patterns resulting from investors’ behaviour. In spite of a number of risk factors, investment strategies based on volatility can enhance the return of the traditional securities portfolio.