Market timing with option-implied distributions in an exponentially tempered stable Lévy market
Autor(a) principal: | |
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Data de Publicação: | 2019 |
Outros Autores: | , |
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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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 |
dc.format.none.fl_str_mv |
application/pdf |
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 |
instname_str |
Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
instacron_str |
RCAAP |
institution |
RCAAP |
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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1799131116322422784 |