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Droplet
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Joined: June 20th, 2004, 7:42 pm

Sentimental Recovery

November 1st, 2019, 10:25 pm

A new paper on recovering subjective physical and risk-neutral bivariate distributions from SP500 and VIX options; the only identifying assumption is the sentiment of an agent (the most probable, according to the agent, region of the future SP500 and VIX) + a good-deal bound restricting the likelihood swap risk-return trade-off. The projection of agent-specific likelihood ratio on the space of traded assets results in an optimal trading strategy for a given sentiment. Works pretty well last 13 years...without any optimization and backtesting... 

Link to SSRN