Sentimental Recovery

Altan Pazarbasi, Paul Schneider and Grigory Vilkov
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Paul Schneider: University of Lugano - Institute of Finance; Swiss Finance Institute

No 19-57, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We extract subjective risk-neutral and physical distributions from option quotes on S&P 500 and VIX futures according to agents’ sentiment. Without assumptions on preferences or underlying processes, we only impose a good-deal bound on the distributions to recover the bivariate distribution of the S&P 500 and VIX. We devise optimal Sharpe ratio trading strategies in S&P500 and VIX futures markets that are subjective to the agents, and implement them at the observed quotes. The bivariate distributions define important investment opportunities that would not be available considering the two markets separately. Dispersion of beliefs regarding both market and volatility dynamics is related to, and predicts macroeconomic indicators.

Keywords: Recovery; sentiment; market views; volatility trading; market spanning (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 G17 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2019-10
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1957

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