Perspectives on systemic risk

Dean Curnutt and George Lam

Abstract

ABSTRACT

Despite the ongoing efforts of policymakers to stabilize the financial markets, investors throughout the world remain vulnerable to an exceptionally high level of systemic risk. Market volatility is elevated, cross-asset correlations have spiked and there are fewsafe places to hide. The roller coaster ride has left many investors again asking whether tail-risk hedging should constitute an active part of their portfolios. It has been shown that long volatility strategies exhibit a negative correlation with the overall market. Given the associated costs, though, are protection strategies a good deal in the long term? Furthermore, if an investor does choose to hedge, how and when should they implement these defensive trades? These are some of the questions that we address in this paper.