The role of option-implied information in improving a portfolio selection

Abdullah, Mimi Hafizah and Bahaludin, Hafizah and Tolos, Siti Marponga (2020) The role of option-implied information in improving a portfolio selection. Project Report. UNSPECIFIED. (Unpublished)

PDF Restricted to Repository staff only Download (329kB) | Request a copy

Abstract

Estimation of parameters such as mean and volatility from historical prices are used as inputs to a portfolio model. Researchers found that estimation parameters based on option prices have made a significant improvement in the performance of a portfolio. To date, the usefulness of an option-implied distribution in a portfolio selection model is still an open question. This research aims to shed some light on this conundrum based on the Dow Jones Industrial Average (DJIA) index data. Firstly, the work is to extract risk-neutral density (RND) of the underlying asset from option prices by differentiating the option prices twice. However, the interpolation and extrapolation techniques are needed in order to provide continuum option prices as required in RND assumption. Secondly, this research converts the RND into RWD. The RND is calibrated using parametric and non-parametric calibrations in order to obtain RWD. The option-implied moments which are calculated based on RND and RWD are used as inputs for a portfolio model. Thirdly, this research compares the performances of a naïve portfolio with that of option-implied distribution portfolio. Empirical evidence shows that the portfolio based on option-implied distribution outperforms the naive portfolio in which it gives lower volatility and higher Sharpe ratio.

Item Type:	Monograph (Project Report)
Additional Information:	4482/79756
Uncontrolled Keywords:	option-implied, risk-neutral density, risk-world density, portfolio selection
Subjects:	Q Science > QA Mathematics > QA276 Mathematical Statistics
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button):	Kulliyyah of Science > Department of Computational and Theoretical Sciences
Depositing User:	Ms Mimi Hafizah Abdullah
Date Deposited:	10 Aug 2020 08:34
Last Modified:	10 Aug 2020 08:34
URI:	http://irep.iium.edu.my/id/eprint/79756

Actions (login required)

View Item