The effect of market conditions on forward-looking portfolio performance

This paper applies a forward looking approach to the minimum variance portfolio optimisation problem for a selection of 100 stocks. The purpose is to determine which market conditions favour this strategy of using option implied information. Out-of-sample volatility, Sharpe ratio, and certainty equivalent return is 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.