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http://hdl.handle.net/10419/50003
  
Title:Portfolio optimization using forward-looking information PDF Logo
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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