Quantifying the characteristics of volatility risk based strategies

The RP Crest Volatility Indices are a means to gauge volatility specific risk factors and their corresponding risk premia on a global basis and across asset classes. They allow us to measure and quantify the risk and return characteristics of volatility risk based strategies, to model their impact in a portfolio context and to quantify the sensitivity of an asset or portfolio to these volatility specific risk factors.

The RP Crest Volatility Index family encompasses four different index types, each with four sub-indices for each asset class covered:  equities, bonds, currencies and commodities.

1. RP Crest - Volatility Level Index ©

The RP Crest - Volatility Level Index measures the implied volatility level of 1-month at-the-money options across assets and regions. The index shows, for a globally diversified basket of options on equity indices, government bond futures, currency and commodity futures,  the level of implied volatilities relative to the long-term median of the realized volatilities since January 1998. The Index, thus, provides a global perspective on the level of uncertainty as perceived by the capital markets. It can be utilized to determine the vega sensitivity of investment strategies or an asset class. In addition, the Index is a powerful instrument to estimate investors’ sentiment.

2. RP Crest - Volatility Risk Premium Index ©

The RP Crest - Volatility Risk Premium Index is a broad measure of the spread between implied volatilities of 1-month at-the-money options and the subsequent 1-month realized volatilities of the respective underlying instruments in equities, bonds, currencies and commodities. The index is a globally aggregated measure of the premium of implied volatilities over realized volatilities. It shows the overall profit potential of a strategy aimed at harvesting volatility risk premiums. The index is not a performance index and it is, therefore, not affected by short-term non-systematic path-dependant performance variations resulting from parameter choices such as exercise price, in-the-moneyness, hedge timing and frequency, roll methods etc.

3. RP Crest - Gamma Performance Index ©

The RP Crest - Gamma Performance Index measures the performance of a strategy that systematically sells 1-month straddles and, on a daily basis, hedges the net delta exposures at the official closing price of the underlying instrument. This is the classic and most common strategy aimed at capturing the volatility risk premium. The strategy sells straddles on equity indices, bonds, currencies and commodities in a diversified manner on a global basis. The RP Crest - Gamma Performance Index is a representative proxy of performance and risk characteristics of global volatility risk premia. As such it is a highly useful benchmarking tool in asset allocation and risk modelling which  possesses a high degree of explanatory power of the performance of traditional and alternative assets.

4. RP Crest - Vega Performance Index ©

The RP Crest - Vega Performance Index measures the performance of a strategy that systematically sells (VIX and VSTOXX) 1-month volatility futures. The short volatility futures positions are held until maturity. The strategy exhibits a positive performance development due to the typically positive term structure (“contango”) of volatility futures markets and the ensuing “roll-down” effect of a short futures position.
The RP Crest - Vega Performance Index shows the performance development of a strategy with a short vega position of -0.23%, i.e. a one point fall in the volatility futures will produce a positive performance of +0.23% in the strategy NAV. The RP Crest - Vega Performance Index is, thus, a measure of a pure “vega-risk” volatility strategy and can be compared to the RP Crest - Gamma Performance Index, which, however, measures the risk premium of the “gamma risk”.
Both indices are a representative proxy for the performance and risk characteristics of global volatility risk premiums and as such useful for benchmarking purposes in asset allocation and risk models. They have a high explanatory power for the performance of traditional and alternative assets.

RP Crest Volatility Indices Data and Indices Guide for Download

Historical data for the indices and their sub-indices as well as an index guide with a detailed description of the index methodology can be downloaded in our client area. To gain access please register here.

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