On the utility maximization of the discrepancy between a perceived and market implied risk neutral distribution

Document Type

Article

Publication Date

11-1-2022

Abstract

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.

Identifier

85124968185 (Scopus)

Publication Title

European Journal of Operational Research

External Full Text Location

https://doi.org/10.1016/j.ejor.2022.01.048

ISSN

03772217

First Page

1215

Last Page

1229

Issue

3

Volume

302

Grant

21-19311S

Fund Ref

Grantová Agentura České Republiky

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