Improving Portfolio Selection Using Option-Implied Volatility and Skewness

45 Pages Posted: 16 Sep 2009 Last revised: 18 Jun 2012

Victor DeMiguel

London Business School

Yuliya Plyakha

Universite du Luxembourg - School of Finance

Raman Uppal

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

Grigory Vilkov

Frankfurt School of Finance & Management

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

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

JEL Classification: G11, G12, G13, G17

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: https://ssrn.com/abstract=1474212 or http://dx.doi.org/10.2139/ssrn.1474212

Victor DeMiguel

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Yuliya Plyakha

Universite du Luxembourg - School of Finance ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

Raman Uppal

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Centre for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

Grigory Vilkov (Contact Author)

Frankfurt School of Finance & Management ( email )

Sonnemannstra├če 9-11
Frankfurt am Main, 60314
Germany

HOME PAGE: http://www.vilkov.net

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