The Performance of Model Based Option Trading Strategies

@inproceedings{Eraker2004ThePO,
  title={The Performance of Model Based Option Trading Strategies},
  author={Bj\orn Eraker},
  year={2004}
}
This paper proposes a way to quantify expected profits and risk to model based trading strategies. A positive portfolio weight is assigned to assets which market prices exceed the price of a theoretical asset pricing model. The position is smaller, ceteris paribus, if the theoretical asset price is sensitive to model parameters subject to estimation uncertainty. Standard mean-variance analysis is used to construct optimal model based portfolio weights. In essence, these portfolio rules allow… CONTINUE READING
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