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Interview

Words From the Wise: An AQR Interview with Ed Thorp

We sat down with Ed Thorp, a pioneer in the mathematical analysis of casino games and investing, to get his insights on an array of topics from casino gambling to quantitative investing.

Perspective

Please Stop Talking About the VIX So Much

It has become quite commonplace to note that the VIX (the CBOE Volatility Index) is currently very low and to worry about it. But Cliff tends to think there's less to worry about than most.

White Paper

Understanding the Volatility Risk Premium

The volatility risk premium (VRP) represents the compensation that investors earn for providing protection against market losses. We explain the reasons why it may exist and explore its historical performance with a simple option-selling strategy.

White Paper

PutWrite versus BuyWrite: Yes, Put-Call Parity Holds Here Too

Surprisingly, the CBOE S&P 500 PutWrite Index has outperformed the CBOE S&P 500 BuyWrite Index by around 1.1 percent annually between 1986 and 2015. We explain the mystery behind this outperformance and its implications for portfolio construction.

Working Paper

Credit Implied Volatility

This paper introduces the concept of a credit implied volatility surface. The credit implied volatility (CIV) can be interpretable as risk-neutral asset volatility of the underlying firm—the slope of the CIV term structure is negative in downturns and positive during expansions.

Working Paper

Cash-Flow Maturity and Risk Premia in CDS Markets

We study the risk adjusted returns of credit default swaps of different maturities to learn more about the impact of higher sensitivities to credit fundamentals.

Working Paper

Causes and Consequences of Margin Levels in Futures Markets

Using a Freedom of Information Act request, we obtained a data set on margin requirements for 16 commodity futures contracts, and used it to explore how margins are set and to test the existing theories on the implications of changing margin levels.

Working Paper

Early Option Exercise: Never Say Never

A classic rule in financial economics: Never exercise a call option and never convert a convertible bond, except just before expiration or dividend payments. This paper shows how this rule breaks down when financial frictions are introduced.

Working Paper

Generalized Recovery

We shed new light, both theoretically and empirically, on the Holy Grail in financial economics: decoding probabilities and risk preferences from asset prices.

Journal Article

An Alternative Option to Portfolio Rebalancing

We explore how investors can use an implementable option selling overlay to improve portfolio rebalancing.