Forward-looking robust portfolio selection
AbstractIn this paper we develop a portfolio optimization strategy based on the extraction of option-implied distributions and the application of robust asset allocation. We compute the option-implied probability density functions of the constituents of the Euro Stoxx 50 Index. To obtain the corresponding risk-adjusted densities, we estimate the risk aversion coefficient through a Berkowitz likelihood test. The correlation structure among the stocks is computed via an ad hoc technique, which provides a correction term for the historical correlations. We implement a robust portfolio construction, in order to incorporate the uncertainty about the estimation error for the expected returns in the optimization procedure.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 913.
Date of creation: Jun 2013
Date of revision:
portfolio allocation; robust optimization; implied correlation; stock options;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-16 (All new papers)
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