Risk Management Strategies

Risk management strategies can be useful for certain types of investors, but they should be well-thought through and appropriate for your asset allocation.

Please find below an overview over some generic risk management strategies. We feature useful generic strategies in this section, but also dedicate some time to disprove some other popular strategies.

We are constantly updating and will publish more of these as we find time to upload them.


Volatility-Based Risk Management Strategies on the S&P 500

Recommendation: Useful for risk mitigations.

A simple volatility-based risk management strategy that generates buy and sell signals based on volatility and daily price changes. Logic: If volatility > x, go flat, otherwise stay long. Calculated as close, but also available as Garman Klass, Parkinson, Rogers Satchell, Garman Klass - Yang Zhang, as well as the simple Yang Zhang volatilities. 1950 - 12/2016 on the S&P 500, returns, risk and Sharpe ratios for each volatility barrier compared to the S&P 500:

Close volatility

Garman Klass volatility

Parkinson volatility

Rogers Satchell volatility

Info:  The Garman and Klass estimator for estimating historical volatility assumes Brownian motion with zero drift and no opening jumps (i.e. the opening = close of the previous period). This estimator is 7.4 times more efficient than the close-to-close estimator.

The Roger and Satchell historical volatility estimator allows for non-zero drift, but assumed no opening jump.

The Garman and Klass - Yang and Zhang estimator is a modified version of the Garman and Klass estimator that allows for opening gaps.

The Yang and Zhang historical volatility estimator has minimum estimation error, and is independent of drift and opening gaps. It can be interpreted as a weighted average of the Rogers and Satchell estimator, the close-open volatility, and the open-close volatility.