We describe how forward-looking information on the statistical properties of an asset can be extracted directly from options market data and how this can be used practically in portfolio management. Although the extraction of a forward-looking risk-neutral distribution is well-established in the literature, the issue of estimation in an illiquid market is not. We use the deterministic SVI volatility model to estimate weekly risk-neutral distribution surfaces. The issue of calibration with sparse and noisy data is considered at length and a simple but robust fitting algorithm is proposed. Furthermore, we attempt to extract real-world implied information by implementing the recovery theorem introduced by Ross (2015). Recovery is an ill-posed problem that requires careful consideration. We describe a regularization methodology for extracting real-world implied distributions and implement this method on a history of SVI volatility surfaces. We analyse the first four moments from the implied risk-neutral and real-world implied distributions and use them as signals within a simple tactical asset allocation framework, finding promising results.

This proceedings volume presents new methods and applications in applied economics with special interest in advanced cross-section data estimation methodology. Featuring select contributions from the 2019 International Conference on Applied Economics (ICOAE 2019) held in Milan, Italy, this book explores areas such as applied macroeconomics, applied microeconomics, applied financial economics, applied international economics, applied agricultural economics, applied marketing and applied managerial economics. International Conference on Applied Economics (ICOAE) is an annual conference that started in 2008, designed to bring together economists from different fields of applied economic research, in order to share methods and ideas. Applied economics is a rapidly growing field of economics that combines economic theory with econometrics, to analyze economic problems of the real world, usually with economic policy interest. In addition, there is growing interest in the field of applied economics for cross-section data estimation methods, tests and techniques. This volume makes a contribution in the field of applied economic research by presenting the most current research. Featuring country specific studies, this book is of interest to academics, students, researchers, practitioners, and policy makers in applied economics, econometrics and economic policy.

Résumé en anglais

Recently, Ross (2015) derived a theorem, namely the "Recovery Theorem", that allows for the recovery of the pricing kernel and real-world asset distribution, under particular assumptions, from a forward-looking risk neutral distribution. However, recovering the real-world distribution involves solving two ill-posed problems. In this paper, we introduce and test the accuracy of a regularised multivariate mixture distribution to recover the real-world distribution. In addition, we show that this method improves the estimation accuracy of the real-world distribution. Furthermore, we carry out an empirical study, using weekly South African Top40 option trade data, to show that the recovered distribution is in line with economic theory.