Equity Volatility Term Structure Risk Premia

Historically, the equity index implied volatility term structure has been in contango during stable market conditions. This can be explained by greater uncertainties of market conditions in the distant future than on a shorter time horizon. During stable market conditions, the strategy captures the volatility term structure premia by selling the short end and buying the long end of the volatility curve using volatility futures contracts on developed country equity market indices. During market turmoil, when the volatility curve moves from contango into backwardation, the strategy unwinds the short volatility position and becomes an effective tail hedge should volatilities continue to rise.

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