Improving Portfolio Selection Using Option-Implied Volatility and Skewness

Our objective in this paper is to examine whether one can use option-implied information to improve the selection of portfolios with a large number of stocks, and to document which aspects of option-implied information are most useful for improving their out-of-sample performance.

Auteur(s) :

Victor DeMiguel

London Business School

Yuliya Plyakha

Goethe University Frankfurt

Raman Uppal

CEPR and EDHEC Business School

Grigory Vilkov

Goethe University Frankfurt

Présentation :

Portfolio performance is measured in terms of four metrics: volatility, Sharpe ratio, certainty-equivalent return and turnover. Our empirical evidence shows that, while using option-implied volatility and correlation does not significantly improve the portfolio volatility, Sharpe ratio and certainty-equivalent return, exploiting information contained in the volatility risk premium and option- implied skewness substantially increases both the Sharpe ratio and certainty- equivalent return, although this is accompanied by higher turnover. Moreover, the volatility risk premium and option-implied skewness help improve not just the performance of mean-variance portfolios, but also the performance of parametric portfolios developed in Brandt, Santa-Clara and Valkanov (2009).
Pdf
Improving Portfolio Selection Using Option-Implied Volatility and Skewness...
(2.98 MB)
Type : Working paper
Date : le 03/01/2011
Complément d'informations For more information, please contact Joanne Finlay, EDHEC Research and Development Department [ joanne.finlay@edhec.edu ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School.
Pôle de recherche Finance

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