Asset allocation using option-implied moments

• Main Authors: Bahaludin, Hafizah, Abdullah, Mimi Hafizah, Tolos, Siti Marponga
• Format: Conference or Workshop Item
• Language: English; English
• Published: Institute of Physics Publishing 2017
• Subjects: QA Mathematics
• Online Access: http://irep.iium.edu.my/57990/17/57990_Asset%20allocation.pdf; http://irep.iium.edu.my/57990/23/57990_Asset%20allocation_SCOPUS.pdf; http://irep.iium.edu.my/57990/; http://iopscience.iop.org/article/10.1088/1742-6596/890/1/012158/pdf
• Institution: Universiti Islam Antarabangsa Malaysia

This study uses an option-implied distribution as the input in asset allocation. The computation of risk-neutral densities (RND) are based on the Dow Jones Industrial Average (DJIA) index option and its constituents. Since the RNDs estimation does not incorporate risk premium, the conversion of RND into risk-world density (RWD) is required. The RWD is obtained through parametric calibration using the beta distributions. The mean, volatility, and covariance are then calculated to construct the portfolio. The performance of the portfolio is evaluated by using portfolio volatility and Sharpe ratio.