Market timing with option-implied distributions in an exponentially tempered stable Lévy market

Detalhes bibliográficos
Autor(a) principal: Guerra, João
Data de Publicação: 2019
Outros Autores: Guerra, Manuel, Polaski, Zachary
Tipo de documento: Artigo
Idioma: eng
Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
Texto Completo: http://hdl.handle.net/10400.5/17445
Resumo: This paper explores the empirical implementation of a dynamic asset allocation strategy using option-implied distributions when the underlying risky asset price is modeled by an exponential Lévy process. One month risk-neutral densities are extracted from option prices and are subsequently transformed to the risk-adjusted, or real-world densities. Optimal portfolios consisting of a risky and risk-free asset rebalanced on a monthly basis are then constructed and their performance analyzed. It is found that the portfolios formed using option-implied expectations under the Lévy market assumption, which are flexible enough to capture the higher moments of the implied distribution, are far more robust to left-tail market risks and offer statistically significant improvements to risk-adjusted performance when investor risk aversion is low, however this diminishes as risk aversion increases.
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spelling Market timing with option-implied distributions in an exponentially tempered stable Lévy marketAsset AllocationLévy ProcessesOption-Implied DistributionsPortfolio OptimizationThis paper explores the empirical implementation of a dynamic asset allocation strategy using option-implied distributions when the underlying risky asset price is modeled by an exponential Lévy process. One month risk-neutral densities are extracted from option prices and are subsequently transformed to the risk-adjusted, or real-world densities. Optimal portfolios consisting of a risky and risk-free asset rebalanced on a monthly basis are then constructed and their performance analyzed. It is found that the portfolios formed using option-implied expectations under the Lévy market assumption, which are flexible enough to capture the higher moments of the implied distribution, are far more robust to left-tail market risks and offer statistically significant improvements to risk-adjusted performance when investor risk aversion is low, however this diminishes as risk aversion increases.ISEG - REM - Research in Economics and MathematicsRepositório da Universidade de LisboaGuerra, JoãoGuerra, ManuelPolaski, Zachary2019-02-25T14:58:28Z2019-022019-02-01T00:00:00Zinfo:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/articleapplication/pdfhttp://hdl.handle.net/10400.5/17445engGuerra, João, Manuel Guerra e Zachary Polaski (2019). "Market timing with option-implied distributions in an exponentially tempered stable Lévy market". Instituto Superior de Economia e Gestão – REM Working paper nº 074 - 20192184-108Xinfo:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2023-03-06T14:47:06Zoai:www.repository.utl.pt:10400.5/17445Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-19T17:02:39.199068Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse
dc.title.none.fl_str_mv Market timing with option-implied distributions in an exponentially tempered stable Lévy market
title Market timing with option-implied distributions in an exponentially tempered stable Lévy market
spellingShingle Market timing with option-implied distributions in an exponentially tempered stable Lévy market
Guerra, João
Asset Allocation
Lévy Processes
Option-Implied Distributions
Portfolio Optimization
title_short Market timing with option-implied distributions in an exponentially tempered stable Lévy market
title_full Market timing with option-implied distributions in an exponentially tempered stable Lévy market
title_fullStr Market timing with option-implied distributions in an exponentially tempered stable Lévy market
title_full_unstemmed Market timing with option-implied distributions in an exponentially tempered stable Lévy market
title_sort Market timing with option-implied distributions in an exponentially tempered stable Lévy market
author Guerra, João
author_facet Guerra, João
Guerra, Manuel
Polaski, Zachary
author_role author
author2 Guerra, Manuel
Polaski, Zachary
author2_role author
author
dc.contributor.none.fl_str_mv Repositório da Universidade de Lisboa
dc.contributor.author.fl_str_mv Guerra, João
Guerra, Manuel
Polaski, Zachary
dc.subject.por.fl_str_mv Asset Allocation
Lévy Processes
Option-Implied Distributions
Portfolio Optimization
topic Asset Allocation
Lévy Processes
Option-Implied Distributions
Portfolio Optimization
description This paper explores the empirical implementation of a dynamic asset allocation strategy using option-implied distributions when the underlying risky asset price is modeled by an exponential Lévy process. One month risk-neutral densities are extracted from option prices and are subsequently transformed to the risk-adjusted, or real-world densities. Optimal portfolios consisting of a risky and risk-free asset rebalanced on a monthly basis are then constructed and their performance analyzed. It is found that the portfolios formed using option-implied expectations under the Lévy market assumption, which are flexible enough to capture the higher moments of the implied distribution, are far more robust to left-tail market risks and offer statistically significant improvements to risk-adjusted performance when investor risk aversion is low, however this diminishes as risk aversion increases.
publishDate 2019
dc.date.none.fl_str_mv 2019-02-25T14:58:28Z
2019-02
2019-02-01T00:00:00Z
dc.type.status.fl_str_mv info:eu-repo/semantics/publishedVersion
dc.type.driver.fl_str_mv info:eu-repo/semantics/article
format article
status_str publishedVersion
dc.identifier.uri.fl_str_mv http://hdl.handle.net/10400.5/17445
url http://hdl.handle.net/10400.5/17445
dc.language.iso.fl_str_mv eng
language eng
dc.relation.none.fl_str_mv Guerra, João, Manuel Guerra e Zachary Polaski (2019). "Market timing with option-implied distributions in an exponentially tempered stable Lévy market". Instituto Superior de Economia e Gestão – REM Working paper nº 074 - 2019
2184-108X
dc.rights.driver.fl_str_mv info:eu-repo/semantics/openAccess
eu_rights_str_mv openAccess
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dc.publisher.none.fl_str_mv ISEG - REM - Research in Economics and Mathematics
publisher.none.fl_str_mv ISEG - REM - Research in Economics and Mathematics
dc.source.none.fl_str_mv reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação
instacron:RCAAP
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instacron_str RCAAP
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reponame_str Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
collection Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
repository.name.fl_str_mv Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação
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