Market timing with option-implied distributions : a forward-looking approach
Kostakis, A., Panigirtzoglou, Nikolaos and Skiadopoulos, George. (2011) Market timing with option-implied distributions : a forward-looking approach. Management Science, Vol.57 (No.7). pp. 1231-1249. ISSN 0025-1909Full text not available from this repository.
Official URL: http://dx.doi.org/10.1287/mnsc.1110.1346
We address the empirical implementation of the static asset allocation problem by developing a forward-looking approach that uses information from market option prices. To this end, we extract constant maturity S&P 500 implied distributions and transform them to the corresponding risk-adjusted ones. Then we form optimal portfolios consisting of a risky and a risk-free asset and evaluate their out-of-sample performance. We find that the use of risk-adjusted implied distributions times the market and makes the investor better off than if she uses historical returns' distributions to calculate her optimal strategy. The results hold under a number of evaluation metrics and utility functions and carry through even when transaction costs are taken into account. Not surprisingly, the reported market timing ability deteriorated during the recent subprime crisis. An extension of the approach to a dynamic asset allocation setting is also presented.
|Item Type:||Journal Article|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Warwick Business School|
|Library of Congress Subject Headings (LCSH):||Asset allocation, Options (Finance), Stock price forecasting, Stock price indexes, Speculation, Investment analysis|
|Journal or Publication Title:||Management Science|
|Publisher:||Institute for Operations Research and the Management Sciences (I N F O R M S)|
|Official Date:||July 2011|
|Page Range:||pp. 1231-1249|
|Funder:||University of Piraeus, Fundação para a Ciência e a Tecnologia (FCT)|
|Grant number:||PTDC/EGE-ECO/099255/2008 (FCT)|
Adler, T., M. Kritzman. 2007. Mean-variance versus full-scale
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