Option portfolio choice under pricing kernel nonmonotonicity
- Topic: Option portfolio choice under pricing kernel nonmonotonicity
- Speaker: Assistant Professor Brendan K. Beare, Department of Economics, University of California San Diego
- Venue:E4A Level 5 Seminar Room 523
- When: 22nd August, 2013, (Thu)
- Time: 11.00am - 12.00pm
A recent literature in empirical finance documents the nonmonotone shape of pricing kernel estimates for several major market indices. In this paper we investigate the implications of pricing kernel nonmonotonicity for option portfolio choice. We propose a portfolio selection procedure that aims to deliver superior returns, relative to a direct market investment, by adapting to the shape of the pricing kernel. Numerical implementation of our procedure may be achieved using a multi objective evolutionary algorithm. We investigate the out-of-sample performance of our portfolio selection procedure using twenty years of data from the market for European put and call options written on the S&P 500 index. Monthly portfolio returns outperform those of a direct market investment.