Share this page
| More

Thursday 25 June 2015

KPMG /ESCP Europe Chair award for the best thesis in 2015

The KPMG / ESCP Europe Chair award for best thesis in 2015 was attributed to René-Jean Corneille for his paper “Volatility Hedging: Are Volatility Options the Better Hedging Instruments?” led by Professor Philippe Spieser.

The prize will be officially awarded at the graduation ceremony on December 4, 2015 at the Palais des Congrès in Paris.

Congratulations to the winner and his professor and thanks to all those who participated in the contest set up by the Chair.

Professor Frédéric Fréry,
Academic Director of the KPMG / ESCP Europe Chair


We introduce a double stochastic volatility framework for the pricing of volatility index derivatives. The model is based on a discrete variance term structure model where volatility indices are defined as derivatives of the variance term structure.
This is motivated by the fact volatility indices are calculated as the square root of a variance swap. We study the probabilistic features of the model and compute an approximation of the returns probability density function. We define non-arbitrage assumptions in a multivariance index framework, and define a risk and volatility neutral martingale measure by completing the market model with liquid traded securities.
We price volatility index options and futures using the model's p.d.f. approximation: the price is given by the sum of the traditional Black-Scholes price and additional terms steming from skewness and kurtosis correction. We compute a parametric approximation of the volatility index implied volatility surface and calibrate this expression to the volatility surface of the VIX and the VSTOXX.
The calibrated data are then used to back test the hedging of equity style risk premia portfolio against volatility risk. Adding volatility options to an equity portfolio results in a substantial reduction of the volatility and the returns distributions of the hedged portfolio have thinner tails than a Gaussian distribution.
We also find that volatility protection is very expensive thus costs in absolute performance. It does not necessarily improve the Sharpe ratio but critically reduce the downside risk.
We compare several volatility protected strategies using a new consistency measure giving a score equal to zero if the provided cumulated returns are a linear function of time.
We find that adding volatility options improves the consistency of returns. We build portfolios that still beat the market and present a much lower downside risk.

<- Back to: News