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CFR Working Papers, Centre for Financial Research (CFR), Universität Köln >
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http://hdl.handle.net/10419/50003
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| Title: | | Portfolio optimization using forward-looking information  |
| Authors: | | Kempf, Alexander Korn, Olaf Saßning, Sven |
| Issue Date: | | 2011 |
| Series/Report no.: | | CFR working paper 11-10 |
| Abstract: | | In this paper we develop the first estimator of the covariance matrix that relies solely on forward-looking information. This estimator only uses price information from a cross-section of plain-vanilla options. In an out-of-sample study for US blue-chip stocks we show that a minimum-variance strategy based on this fully implied estimator consistently outperforms a wide range of benchmark strategies, including strategies based on historical estimates, index investing, and investing according to the 1/N rule. The outperformance is strong in periods of high information asymmetry, whereas in quiet periods all strategies lead to similar results. The outperformance can only be reached using a fully implied approach; partially implied approaches that combine implied moments with historical ones might even perform worse than purely historical approaches. |
| JEL: | | G11 G13 G17 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CFR Working Papers, Centre for Financial Research (CFR), Universität Köln
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