Journal of Investment Strategies

The effect of market conditions on forward-looking portfolio performance

Binam Ghimire, Leigh Perrott and Dipesh Karki

  • This paper finds the forward looking approach as a promising area of investigation in portfolio optimisation.
  • It shows that the Global minimum variance portfolio (GMVP) strategies have much smaller volatilities and GMVP strategies with shorter estimation window generates better performance both in terms of portfolio value and volatility.
  • As a recommendation to investors, the paper finds that the forward looking GMVP presents a very attractive method for capturing a high degree of diversification benefits.


This paper applies a forward-looking approach to the minimum variance portfolio optimization problem for a selection of 100 stocks. The purpose is to determine which market conditions favor this strategy of using option-implied information. Out-of-sample volatility, the Sharpe ratio and certainty equivalent return have been measured against eight benchmarks, including the equal-weighted 1/N and minimum variance portfolio based on historical estimates. Equivalent or superior performance is evident in terms of reduced volatility and higher certainty equivalent return. However, strict outperformance of the best benchmarks is only seen when option-to-stock volume ratios are high and information signals in the options market are strongest.

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