Sentimental Recovery

41 Pages Posted: 31 Oct 2019 Last revised: 5 Dec 2019

See all articles by Altan Pazarbasi

Altan Pazarbasi

Frankfurt School of Finance & Management

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Grigory Vilkov

Frankfurt School of Finance & Management

Date Written: October 31, 2019

Abstract

We extract subjective risk-neutral and physical distributions from option quotes on S&P500 and VIX futures according to agents' sentiment without assumptions on preferences or underlying processes. Beliefs are crucial for the recovered distributions and the change of measure. The recovered joint distributions imply marginal distributions markedly different from conventional univariate approaches. Using expected volatility as the second dimension allows to differentiate economic states more precisely by taking future investment opportunities into account. With these distributions at hand, we devise optimal Sharpe ratio trading strategies in S&P500 and VIX futures markets that are subjective to the agents, and implement them at the observed quotes. The bivariate distributions define important investment opportunities that would not be available considering the two markets separately. Dispersion of beliefs regarding both market and volatility dynamics is related to, and predicts macroeconomic indicators.

Keywords: Recovery, sentiment, market views, volatility trading, market spanning

JEL Classification: G11, G12, G13, G17

Suggested Citation

Pazarbasi, Altan and Schneider, Paul Georg and Vilkov, Grigory, Sentimental Recovery (October 31, 2019). Swiss Finance Institute Research Paper No. 19-57. Available at SSRN: https://ssrn.com/abstract=3478587

Altan Pazarbasi

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Paul Georg Schneider

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Grigory Vilkov (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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

Register to save articles to
your library

Register

Paper statistics

Downloads
173
Abstract Views
604
rank
177,262
PlumX Metrics