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Portfolio optimization using forward-looking information

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  • Kempf, Alexander
  • Korn, Olaf
  • Saßning, Sven
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    Abstract

    We develop a new family of estimators of the covariance matrix that relies solely on forwardlooking information. It uses only current prices of plain-vanilla options. In an out-of-sample study we show that a minimum-variance strategy based on these fully-implied estimators outperforms several benchmark strategies, including various strategies based on historical estimates, index investing, and 1/N investing. The outperformance originates in crisis periods when information ow and information asymmetry are high. Although the historical benchmark strategies improve when more recent data is used, they never outperform fully-implied strategies. Thus, our results suggest that investors are better off relying on forward-looking information. --

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    Bibliographic Info

    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 11-10 [rev.].

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    Date of creation: 2014
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    Handle: RePEc:zbw:cfrwps:1110r

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    Keywords: portfolio selection; option-implied information;

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