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Sentimental Recovery

Author

Listed:
  • 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)

Abstract

We extract subjective risk-neutral and physical distributions from option quotes on S&P 500 and VIX futures according to agents’ sentiment. Without assumptions on preferences or underlying processes, we only impose a good-deal bound on the distributions to recover the bivariate distribution of the S&P 500 and VIX. 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.

Suggested Citation

  • Altan Pazarbasi & Paul Schneider & Grigory Vilkov, 2019. "Sentimental Recovery," Swiss Finance Institute Research Paper Series 19-57, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1957
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    More about this item

    Keywords

    Recovery; sentiment; market views; volatility trading; market spanning;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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