The effect of market conditions on forward looking portfolio performance

Binam Ghimire, Leigh Perrott, Dipesh Karki

    Research output: Contribution to journalArticle

    Abstract

    This paper applies a forward looking approach to the minimum variance portfolio optimisation problem for a selection of 100 stocks. The purpose is to determine which market conditions favour this strategy of using option implied information. Out-of-sample volatility, Sharpe ratio, and certainty equivalent return is measured against eight benchmarks, including the equal weighted 1/N and minimum variance portfolio based on historical estimates. Equivalent or superior performance is evident in terms of reduced volatility and higher certainty equivalent return. However, strict outperformance of the best benchmarks is only seen when option-to-stock volume ratios are high and information signals in the options market are strongest.
    Original languageEnglish
    Pages (from-to)51-85
    JournalJournal of Investment Strategies
    Volume5
    Issue number4
    Early online date18 Aug 2016
    DOIs
    Publication statusPublished - Sep 2016

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