Reference : Improving Portfolio Selection Using Option-Implied Volatility and Skewness
Scientific journals : Article
Business & economic sciences : Finance
Improving Portfolio Selection Using Option-Implied Volatility and Skewness
DeMiguel, Victor []
Plyakha, Yuliya [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Luxembourg School of Finance (LSF) >]
Uppal, Raman []
Vilkov, Grigory []
Journal of Financial and Quantitative Analysis
University of Washington Graduate School of Business Administration and the Western Finance Association
Yes (verified by ORBilu)
[en] 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 to improve 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 short sales and accounting for transaction costs.

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