Abstract

http://ssrn.com/abstract=1474212
 
 

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Improving Portfolio Selection Using Option-Implied Volatility and Skewness


Victor DeMiguel


London Business School - Department of Management Science and Operations

Yuliya Plyakha


Goethe University Frankfurt am Main

Raman Uppal


EDHEC Business School; Centre for Economic Policy Research (CEPR)

Grigory Vilkov


Frankfurt School of Finance & Management

June 17, 2012


Abstract:     
Our objective in this paper is to examine whether one can use option-implied information to improve the selection of mean-variance portfolios with a large number of stocks, and to document which aspects of option-implied information are most useful for improving their out-of-sample performance. Portfolio performance is measured in terms of volatility, Sharpe ratio, and turnover. Our empirical evidence shows that using option-implied volatility helps to reduce portfolio volatility. Using option-implied correlation does not improve any of the metrics. Using option-implied volatility, risk-premium, and skewness to adjust expected returns leads to a substantial improvement in the Sharpe ratio, even after prohibiting shortsales and accounting for transactions costs.

Number of Pages in PDF File: 45

Keywords: mean variance, option-implied volatility, variance risk premium, option-implied skewness, portfolio optimization

JEL Classification: G11, G12, G13, G17

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Date posted: September 16, 2009 ; Last revised: June 18, 2012

Suggested Citation

DeMiguel, Victor and Plyakha, Yuliya and Uppal , Raman and Vilkov, Grigory, Improving Portfolio Selection Using Option-Implied Volatility and Skewness (June 17, 2012). Available at SSRN: http://ssrn.com/abstract=1474212 or http://dx.doi.org/10.2139/ssrn.1474212

Contact Information

Victor DeMiguel
London Business School - Department of Management Science and Operations ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
Yuliya Plyakha
Goethe University Frankfurt am Main ( email )
Grüneburgplatz 1,
Uni-PF 13
Frankfurt am Main, Hessen 60323
Germany
HOME PAGE: http://www.finance.uni-frankfurt.de/schlag/index.php?case=wimi2&men=2&id=877&lg=0
Raman Uppal
EDHEC Business School ( email )
10 Fleet Place, Ludgate
London, EC4M 7RB
United Kingdom
+44 20 7871 6744 (Phone)
90-98 Goswell Road
London, EC1V 7RR
United Kingdom
Grigory Vilkov (Contact Author)
Frankfurt School of Finance & Management ( email )
Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany
HOME PAGE: http://www.vilkov.net
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