Forward-looking portfolio selection with multivariate non-Gaussian models and the Esscher transform

Michele Leonardo Bianchi and Gian Luca Tassinari

Papers from arXiv.org

Abstract: In this study we suggest a portfolio selection framework based on option-implied information and multivariate non-Gaussian models. The proposed models incorporate skewness, kurtosis and more complex dependence structures among stocks log-returns than the simple correlation matrix. The two models considered are a multivariate extension of the normal tempered stable (NTS) model and the generalized hyperbolic (GH) model, respectively, and the connection between the historical measure P and the risk-neutral measure Q is given by the Esscher transform. We consider an estimation method that simultaneously calibrate the time series of univariate log-returns and the univariate observed volatility smile. To calibrate the models, there is no need of liquid multivariate derivative quotes. The method is applied to fit a 50-dimensional series of stock returns, to evaluate widely known portfolio risk measures and to perform a portfolio selection analysis.

Date: 2018-05, Revised 2018-05
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (4)

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