Cheang, Chi Wan, Olmo, Jose, Ma, Tiejun, Sung, Ming-Chien and McGroarty, Frank (2020) Optimal asset allocation using a combination of implied and historical information. International Review of Financial Analysis, 67, 1-14, [101419]. (doi:10.1016/j.irfa.2019.101419).
Abstract
This paper investigates the contribution of option-implied information for strategic asset allocation for individuals with minimum-variance preferences and portfolios with a variety of assets. We propose a covariance matrix that exploits a mixture of historical and option-implied information. Implied variance measures are proposed for those assets for which option-implied information is available. Historical variance and correlation measures are applied to the remaining assets. The performance of this novel approach for constructing optimal investment portfolios is assessed out-of-sample using statistical and economic measures. An empirical application to a sophisticated portfolio comprised by a combination of equities, fixed income, alternative securities and cash deposits shows that implied variance measures with risk premium correction outperform variance measures constructed from historical data and implied variance without correction. This result is robust across investment portfolios, volatility and portfolio performance metrics, and rebalancing schemes.
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- Current Faculties > Faculty of Social Sciences > Southampton Business School > Banking and Finance
Southampton Business School > Banking and Finance - Current Faculties > Faculty of Social Sciences > Centre for Operational Research, Management Science and Information Systems (CORMSIS)
- Faculties (pre 2018 reorg) > Faculty of Engineering and the Environment (pre 2018 reorg) > Southampton Marine & Maritime Institute (pre 2018 reorg)
- Current Faculties > Faculty of Social Sciences > Southampton Business School > Decision Analytics and Risk
Southampton Business School > Decision Analytics and Risk - Current Faculties > Faculty of Social Sciences > Southampton Business School > Decision Analytics and Risk > Centre for Risk Research (CRR)
Southampton Business School > Decision Analytics and Risk > Centre for Risk Research (CRR) - Current Faculties > Faculty of Social Sciences > School of Economic Social and Political Science > Economics
School of Economic Social and Political Science > Economics
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