Forward-looking measures of higher-order dependencies with an application to portfolio selection

Arbeitspapier

This paper provides implied measures of higher-order dependencies between assets. The measures exploit only forward-looking information from the options market and can be used to construct an implied estimator of the covariance, co-skewness, and co-kurtosis matrices of asset returns. We implement the estimator using a sample of US stocks. We show that the higher-order dependencies vary heavily over time and identify which driving them. Furthermore, we run a portfolio selection exercise and show that investors can benefit from the better out-of-sample performance of our estimator compared to various historical benchmark estimators. The benefit is up to seven percent per year.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFR Working Paper ; No. 13-08 [rev.]

Classification and Topics

• Classification: Wirtschaft ; Portfolio Choice; Investment Decisions ; Contingent Pricing; Futures Pricing; option pricing ; Financial Forecasting and Simulation
• Subject: option-implied information ; dependence measures ; higher moments ; portfolio selection

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Brinkmann, Felix ; Kempf, Alexander ; Korn, Olaf
• Event: Veröffentlichung
• (who): University of Cologne, Centre for Financial Research (CFR)
• (where): Cologne
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/92384
• Last update: 10.03.2025, 11:43 AM CET