Forward-looking P

37 Pages Posted: 17 Aug 2019

See all articles by Maxim Ulrich

Maxim Ulrich

Karlsruhe Institute of Technology

Simon Walther

Karlsruhe Institute of Technology; Universal-Investment-Luxembourg S.A. Niederlassung Frankfurt am Main

Jonas Rothfuss

ETH Zürich

Fabio Ferreira

Karlsruhe Institute of Technology

Date Written: August 14, 2019

Abstract

We present a forward-looking estimator for the time-varying physical return distribution with minimal prior assumptions about the shape of the distribution and no exogenous assumptions about the economy or preferences. Our estimator, which is based on a neural network, derives its forecasts from option-implied measures and predicts the conditional mean and volatility of returns such that profitable trading strategies can be derived. In contrast to backward-looking estimators and alternative forward-looking parametric and non-parametric approaches, its distribution forecasts cannot be rejected in statistical tests and it features lower prediction errors and higher conditional log likelihood values than the alternatives.

Keywords: physical density, density prediction, neural network, option-implied, forward-looking, return forecast, variance forecast, machine learning

JEL Classification: G12, G17, C45, C53

Suggested Citation

Ulrich, Maxim and Walther, Simon and Rothfuss, Jonas and Ferreira, Fabio, Forward-looking P (August 14, 2019). Available at SSRN: https://ssrn.com/abstract=3437281 or http://dx.doi.org/10.2139/ssrn.3437281

Maxim Ulrich

Karlsruhe Institute of Technology ( email )

Bluecherstrasse 17
Karlsruhe, Baden Württemberg 76131
Germany
+4972160844270 (Phone)

HOME PAGE: http://risk.fbv.kit.edu/c-ram

Simon Walther (Contact Author)

Karlsruhe Institute of Technology ( email )

Bluecherstrasse 17
Karlsruhe, Baden Württemberg 76131
Germany

Universal-Investment-Luxembourg S.A. Niederlassung Frankfurt am Main ( email )

Theodor-Heuss-Allee 70
Frankfurt am Main, 60486
Germany

Jonas Rothfuss

ETH Zürich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Fabio Ferreira

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

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