Universität zu Köln

Kempf, Alexander, Korn, Olaf and Sassning, Sven (2015). Portfolio Optimization Using Forward-Looking Information*. Rev. Financ., 19 (1). S. 467 - 491. OXFORD: OXFORD UNIV PRESS. ISSN 1573-692X

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Abstract

We develop a new family of estimators of the covariance matrix that relies solely on forward-looking 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 flow and information asymmetry are high. Although the historical benchmark strategies improve when more recent data are used, they never outperform fully-implied strategies. Thus, our results suggest that investors are better off relying on forward-looking information.

Item Type:	Journal Article
Creators:	Creators Email ORCID ORCID Put Code Kempf, Alexander UNSPECIFIED UNSPECIFIED UNSPECIFIED Korn, Olaf UNSPECIFIED UNSPECIFIED UNSPECIFIED Sassning, Sven UNSPECIFIED UNSPECIFIED UNSPECIFIED
URN:	urn:nbn:de:hbz:38-405994
DOI:	10.1093/rof/rfu006
Journal or Publication Title:	Rev. Financ.
Volume:	19
Number:	1
Page Range:	S. 467 - 491
Date:	2015
Publisher:	OXFORD UNIV PRESS
Place of Publication:	OXFORD
ISSN:	1573-692X
Language:	English
Faculty:	Unspecified
Divisions:	Unspecified
Subjects:	no entry
Uncontrolled Keywords:	Keywords Language IMPLIED VOLATILITY; OPTION VOLUME; STOCK; RISK; RETURN; PRICES; COVARIANCES; PERFORMANCE; MODEL; INDEX Multiple languages Business, Finance; Economics Multiple languages
URI:	http://kups.ub.uni-koeln.de/id/eprint/40599