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

Felix Brinkmann, Alexander Kempf and Olaf Korn

No 13-08 [rev.], CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: 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.

Keywords: option-implied information; dependence measures; higher moments; portfolio selection (search for similar items in EconPapers)
JEL-codes: G11 G13 G17 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-mst and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:1308r

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