Hedging Realized vs. Expected Volatility

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Not all conferences can be above average, let alone in the extreme right tail of the distribution, so it’s wonderful when it happens, as with last week’s AP conference. Fine papers all — timely, thought provoking, and empirically sophisticated.  Thanks to Jan Eberly and Konstantin Milbradt for assembling the program, here (including links to papers). 

I keep thinking about the Dew-Becker-Giglio-Kelly paper. For returns r, they produce evidence that (1) investors are willing to pay a lot to insure against movements in realized volatility, r^2_{t}, but (2) investors are not willing to pay to insure against movements in expected future realized volatility (conditional variance), E_t(r^2_{t+1} | I_t). On the one hand, as a realized volatility guy I’m really intrigued by (1). On the other hand, it seems hard to reconcile (1) and (2), a concern that was raised at the meeting. On the third hand, maybe it’s not so hard.  Hmmm…
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