Improving portfolio selection using option-implied volatility and skewness
Journal
Journal of Financial and Quantitative Analysis
Subject
Management Science and Operations
Publishing details
Authors / Editors
De Miguel V; Plyakha Y; Uppal R; Vilkov G
Biographies
Publication Year
2013
Abstract
Our objective in this paper is to examine whether one can use option-implied information to improve the selection of mean-variance portfolios with a large number of stocks, and to document which aspects of option-implied information are most useful to improve their out-of-sample performance. Portfolio performance is measured in terms of volatility, Sharpe ratio, and turnover. Our empirical evidence shows that using option-implied volatility helps to reduce portfolio volatility. Using option-implied correlation does not improve any of the metrics. Using option-implied volatility, risk premium, and skewness to adjust expected returns leads to a substantial improvement in the Sharpe ratio, even after prohibiting short sales and accounting for transaction costs.
Available on ECCH
No
