Optimal portfolio allocation using option implied information.

M. Kyriacou, M. Strittmatter and J. Olmo (2021). Journal of Futures Markets 41, 2, 266-285

This paper explores option-implied information measures for optimal portfolio allocation. We introduce two state variables constructed from option prices. The first state variable is the risk premium on the risky asset and the second variable is the market price of risk. We also explore a lognormal distribution, a mixture of lognormal distributions and a binomial tree for constructing the implied risk neutral density function. Using a combination of statistical and economic measures applied to a portfolio given by the one-month US Treasury bill and the S&P 500 Index we show the good performance of option-implied information measures for optimal portfolio allocation.

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