A financial modeling approach to industry exchange-traded funds selection

Conlon T. Cotter J. Kovalenko I. Post T.
December 2023 Elsevier B.V.

Journal of Empirical Finance
2023 #74

This study uses a comprehensive approach to optimize the portfolio allocation to equity sector Exchange Traded Funds. We combine data on the market prices of options written on the funds, the Heston stochastic volatility model, risk premium transformation, copulas, and optimization with stochastic dominance constraints. This comprehensive strategy provides significant performance out-of-sample gains relative to the passive and active alternative strategies, both before and after accounting for risk and transaction costs. Our findings point at market inefficiencies that can be exploited using sector funds, past public data, and blending multiple methods.

Copulas , Option-implied distribution , Portfolio optimization , Sector exchange traded funds , Stochastic dominance

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Smurfit School of Business, University College Dublin, Dublin, Ireland
Kemmy Business School, University of Limerick, Limerick, Ireland
Graduate School of Business of Nazarbayev University, Astana, Kazakhstan

Smurfit School of Business
Kemmy Business School
Graduate School of Business of Nazarbayev University

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