TY - JOUR
T1 - On the utility maximization of the discrepancy between a perceived and market implied risk neutral distribution
AU - Navratil, Robert
AU - Taylor, Stephen
AU - Vecer, Jan
N1 - Publisher Copyright:
© 2022 Elsevier B.V.
PY - 2022/11/1
Y1 - 2022/11/1
N2 - A method is developed to determine the portfolio that maximizes the expected utility of an agent that trades the difference between a perceived future price distribution of an asset and the associated market implied risk neutral density. Exact results to construct and price such a portfolio are presented under the assumption that the underlying asset price evolves according to a geometric Brownian motion. Integer programming optimization techniques are applied to the general case where one first calibrates the asset price risk neutral density directly from option market data using Gatheral's SVI parameterization. Several numerical examples approximating the optimal payoff function with liquid securities are given.
AB - A method is developed to determine the portfolio that maximizes the expected utility of an agent that trades the difference between a perceived future price distribution of an asset and the associated market implied risk neutral density. Exact results to construct and price such a portfolio are presented under the assumption that the underlying asset price evolves according to a geometric Brownian motion. Integer programming optimization techniques are applied to the general case where one first calibrates the asset price risk neutral density directly from option market data using Gatheral's SVI parameterization. Several numerical examples approximating the optimal payoff function with liquid securities are given.
KW - Integer programming
KW - Kelly criterion
KW - Merton's problem
KW - Portfolio optimization
UR - http://www.scopus.com/inward/record.url?scp=85124968185&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85124968185&partnerID=8YFLogxK
U2 - 10.1016/j.ejor.2022.01.048
DO - 10.1016/j.ejor.2022.01.048
M3 - Article
AN - SCOPUS:85124968185
SN - 0377-2217
VL - 302
SP - 1215
EP - 1229
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 3
ER -