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Option Portfolio Selection with Generalized Entropic Portfolio Optimization
In this third and final paper of our series on the topic of portfolio optimization, we introduce a further generalized portfolio selection method called generalized entropic portfolio optimization (GEPO). GEPO extends discrete entropic portfolio optimization (DEPO) to include intervals of continuous...
Autores principales: | , , |
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Formato: | Online Artículo Texto |
Lenguaje: | English |
Publicado: |
MDPI
2020
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Materias: | |
Acceso en línea: | https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7517377/ https://www.ncbi.nlm.nih.gov/pubmed/33286576 http://dx.doi.org/10.3390/e22080805 |
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author | Mercurio, Peter Joseph Wu, Yuehua Xie, Hong |
author_facet | Mercurio, Peter Joseph Wu, Yuehua Xie, Hong |
author_sort | Mercurio, Peter Joseph |
collection | PubMed |
description | In this third and final paper of our series on the topic of portfolio optimization, we introduce a further generalized portfolio selection method called generalized entropic portfolio optimization (GEPO). GEPO extends discrete entropic portfolio optimization (DEPO) to include intervals of continuous returns, with direct application to a wide range of option strategies. This lays the groundwork for an adaptable optimization framework that can accommodate a wealth of option portfolios, including popular strategies such as covered calls, married puts, credit spreads, straddles, strangles, butterfly spreads, and even iron condors. These option strategies exhibit mixed returns: a combination of discrete and continuous returns with performance best measured by portfolio growth rate, making entropic portfolio optimization an ideal method for option portfolio selection. GEPO provides the mathematical tools to select efficient option portfolios based on their growth rate and relative entropy. We provide an example of GEPO applied to real market option portfolio selection and demonstrate how GEPO outperforms traditional Kelly criterion strategies. |
format | Online Article Text |
id | pubmed-7517377 |
institution | National Center for Biotechnology Information |
language | English |
publishDate | 2020 |
publisher | MDPI |
record_format | MEDLINE/PubMed |
spelling | pubmed-75173772020-11-09 Option Portfolio Selection with Generalized Entropic Portfolio Optimization Mercurio, Peter Joseph Wu, Yuehua Xie, Hong Entropy (Basel) Article In this third and final paper of our series on the topic of portfolio optimization, we introduce a further generalized portfolio selection method called generalized entropic portfolio optimization (GEPO). GEPO extends discrete entropic portfolio optimization (DEPO) to include intervals of continuous returns, with direct application to a wide range of option strategies. This lays the groundwork for an adaptable optimization framework that can accommodate a wealth of option portfolios, including popular strategies such as covered calls, married puts, credit spreads, straddles, strangles, butterfly spreads, and even iron condors. These option strategies exhibit mixed returns: a combination of discrete and continuous returns with performance best measured by portfolio growth rate, making entropic portfolio optimization an ideal method for option portfolio selection. GEPO provides the mathematical tools to select efficient option portfolios based on their growth rate and relative entropy. We provide an example of GEPO applied to real market option portfolio selection and demonstrate how GEPO outperforms traditional Kelly criterion strategies. MDPI 2020-07-22 /pmc/articles/PMC7517377/ /pubmed/33286576 http://dx.doi.org/10.3390/e22080805 Text en © 2020 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/). |
spellingShingle | Article Mercurio, Peter Joseph Wu, Yuehua Xie, Hong Option Portfolio Selection with Generalized Entropic Portfolio Optimization |
title | Option Portfolio Selection with Generalized Entropic Portfolio Optimization |
title_full | Option Portfolio Selection with Generalized Entropic Portfolio Optimization |
title_fullStr | Option Portfolio Selection with Generalized Entropic Portfolio Optimization |
title_full_unstemmed | Option Portfolio Selection with Generalized Entropic Portfolio Optimization |
title_short | Option Portfolio Selection with Generalized Entropic Portfolio Optimization |
title_sort | option portfolio selection with generalized entropic portfolio optimization |
topic | Article |
url | https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7517377/ https://www.ncbi.nlm.nih.gov/pubmed/33286576 http://dx.doi.org/10.3390/e22080805 |
work_keys_str_mv | AT mercuriopeterjoseph optionportfolioselectionwithgeneralizedentropicportfoliooptimization AT wuyuehua optionportfolioselectionwithgeneralizedentropicportfoliooptimization AT xiehong optionportfolioselectionwithgeneralizedentropicportfoliooptimization |