Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/92383
Authors: 
Kempf, Alexander
Korn, Olaf
Saßning, Sven
Year of Publication: 
2014
Series/Report no.: 
CFR Working Paper 11-10 [rev.]
Abstract: 
We develop a new family of estimators of the covariance matrix that relies solely on forwardlooking information. It uses only current prices of plain-vanilla options. In an out-of-sample study we show that a minimum-variance strategy based on these fully-implied estimators outperforms several benchmark strategies, including various strategies based on historical estimates, index investing, and 1/N investing. The outperformance originates in crisis periods when information ow and information asymmetry are high. Although the historical benchmark strategies improve when more recent data is used, they never outperform fully-implied strategies. Thus, our results suggest that investors are better off relying on forward-looking information.
Subjects: 
portfolio selection
option-implied information
JEL: 
G11
G13
G17
Document Type: 
Working Paper

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