Risk-neutral return distributions as investment opportunities

Dilip B. Madan and King Wang

Journal of Risk Model Validation

Abstract: Methods for assessing investment-value-based risk-neutral distributions are developed, and nonzero mean returns are extracted by focusing on the return from the next n moves. These distributions are vacuous for many of the traditional limit laws fitted to option prices. New finite-activity models that synthesize option prices are employed to extract such distributions from option data. The resulting mean returns are risk adjusted to determine a conservative and positive financial valuation using convex sets of risk acceptability, as described in financial finance valuation theory and monetary utility theory. Fast algorithms are developed for determining scale-optimized valuations. Indexes of value are created by formulating a geometric weighted average of the daily extracted indexes. The indexes are used in a variety of trading strategies and are observed to improve performance metrics.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/node/7964007 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ5:7964007

Access Statistics for this article

More articles in Journal of Risk Model Validation from Journal of Risk Model Validation
Bibliographic data for series maintained by Thomas Paine ().