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Market timing with option-implied distributions in an exponentially tempered stable Lévy market
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Orientador(es)
Resumo(s)
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.
Descrição
Palavras-chave
Asset Allocation Lévy Processes Option-Implied Distributions Portfolio Optimization
Contexto Educativo
Citação
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
Editora
ISEG - REM - Research in Economics and Mathematics