IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Market Timing with Option-Implied Distributions: A Forward-Looking Approach

  • Alexandros Kostakis


    (Liverpool Management School, University of Liverpool, Liverpool L69 7ZH, United Kingdom)

  • Nikolaos Panigirtzoglou


    (Department of Economics, University of London, London E1 4NS, United Kingdom)

  • George Skiadopoulos


    (Department of Banking and Financial Management, University of Piraeus, Piraeus 18534, Greece; Financial Options Research Centre, Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom; and Cass Business School, City University London, London EC1Y 8TZ, United Kingdom)

We address the empirical implementation of the static asset allocation problem by developing a forward-looking approach that uses information from market option prices. To this end, we extract constant maturity S&P 500 implied distributions and transform them to the corresponding risk-adjusted ones. Then we form optimal portfolios consisting of a risky and a risk-free asset and evaluate their out-of-sample performance. We find that the use of risk-adjusted implied distributions times the market and makes the investor better off than if she uses historical returns' distributions to calculate her optimal strategy. The results hold under a number of evaluation metrics and utility functions and carry through even when transaction costs are taken into account. Not surprisingly, the reported market timing ability deteriorated during the recent subprime crisis. An extension of the approach to a dynamic asset allocation setting is also presented. This paper was accepted by Wei Xiong, finance.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Article provided by INFORMS in its journal Management Science.

Volume (Year): 57 (2011)
Issue (Month): 7 (July)
Pages: 1231-1249

in new window

Handle: RePEc:inm:ormnsc:v:57:y:2011:i:7:p:1231-1249
Contact details of provider: Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
Phone: +1-443-757-3500
Fax: 443-757-3515
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:57:y:2011:i:7:p:1231-1249. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.