Description
Book Synopsis"TAIL RISKS" originate from the failure of mean reversion and the idealized bell curve of asset returns, which assumes that highly probable outcomes occur near the center of the curve and that unlikely occurrences, good and bad, happen rarely, if at all, at either "tail" of the curve. Ever since the global financial crisis, protecting investments against these severe tail events has become a priority for investors and money managers, but it issomething Vineer Bhansali and his team at PIMCO have been doing for over a decade. In one of the first comprehensive and rigorous books ever written on tail risk hedging, he lays out a systematic approach to protecting portfolios from, and potentially benefiting from, rare yet severe market outcomes.
Tail Risk Hedging is built on the author'spractical experience applying macroeconomic forecasting and quantitative modeling techniques across asset markets. Using empirical data and charts, he explains the consequences of diversificati
Table of Contents
Foreword by Mohamed El-Erian xi
Introduction xv
Acknowledgments xix
Chapter 1: Introduction to Tail Risk and Tail
Risk Management 1
Lessons Learned 1
Distressed Liquidation and Failure of Diversification 18
Chapter 2: Basics- Tail Risk Hedging for Defense 25
Formal Derivation of Portfolio Hedges Using Factor Hedges 30
Rolling Tail Hedges 32
Benchmarking Tail Risk Management 37
Cash Versus Explicit Tail Hedging 43
Chapter 3 Offensive Tail Risk Hedging 51
A Model to Compute the Value of Tail Hedging 56
Model Calibration 57
Chapter 4: Active Tail Risk Management 71
Creating a Long History 78
Active Monetization Rules 84
Chapter 5: Indirect Hedging and Basis Risk 93
Quantifying Basis Risk 95
Hedge Matching at the Attachment Point 98
“Soft” Indirects: Comparing Puts versus Put Spreads 104
Basis Risk from Correlated Asset Classes 107
Chapter 6: Other Tail Risk Management Strategies 129
Tail Risk Hedging versus Asset Allocation in a Multimodal World 129
The Hedging Value in Trends and Momentum 134
A Look at the Risks and Rewards of Costless Collars 138
Variance Swaps and Direct Volatility-Based Hedging 141
Dynamic Hedging 146
Chapter 7: A Behavioral Perspective on Tail Risk Hedging 153
Narrow Framing and Tail Risk Hedging 154
Pricing of Put Options on a Standalone Basis 161
Multiple Equilibria and Expected Returns on Tail Hedges 165
Precommitment and Procyclicality 169
Chapter 8: Tail Risk Hedging for Retirement Investments 179
Chapter 9: Inflation and Duration Tail Risk Hedging 193
Hedging at the Money Inflation versus Inflation Tails 195
Tail Hedging Realized Inflation versus Inflation Expectations 198
Inflation Dynamics and Inflation Spikes 202
Framework for Inflation Tail Hedging 210
Benchmarking Inflation Tail Hedges 211
Pricing of Inflation Options 212
Options on CPI 212
Options on the Breakeven Inflation Rate 215
Indirect Inflation Tail Risk Hedging and Basis Risk 217
Pricing of Tail Interest-Rate Swaptions 219
Indirect Hedges 221
Example of Gold Options as Proxy Tail Hedge 222
Notes 225
Bibliography 231
Index 235
