2001-03-01, English, Article, Journal or magazine article edition: Derivatives Performance Attribution. Rubinstein, Mark

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Physical Description
  • Magazine/​Journal article
Published
  • University of Washington, 2001 March
Language
  • English

Edition details

Title
  • Derivatives Performance Attribution.
Appears In
  • Journal of Financial and Quantitative Analysis, v.36, no.1, 2001 March, p.75 (ISSN: 0022-1090)
Author
  • Rubinstein, Mark
Published
  • University of Washington, 2001 March
Physical Description
  • Magazine/​Journal article
Subjects
Target Audience
  • Academic
  • Trade
Summary
  • This paper shows how to decompose the dollar profit earned from an option into two basic components: i) mispricing of the option relative to the asset at the time of purchase; and ii) profit from subsequent fortuitous changes or mispricing of the underlying asset. This separation hinges on measuring the "true relative value" of the option from its realized payoff. The payoff from any one option has a huge standard error about this value that can be reduced by averaging the payoff from several independent option positions. Simulations indicate that 95% reductions in standard errors can be further achieved by using the payoff of a dynamic replicating portfolio as a Monte Carlo control variate. In addition, the paper shows that these low standard errors are robust to discrete rather than continuous dynamic replication and to the likely degree of misspecification of the benchmark formula used to implement the replication. Option mispricing profit can be further decomposed into profit due to superior estimation of the volatility (volatility profit) and profit from using a superior option valuation formula (formula profit). To make this decomposition reliably, the benchmark formula used for the attribution needs to be similar to the formula implicitly used by the market to price options. If so, then simulation indicates that this further decomposition can be achieved with low standard errors. Basic component ii) can be further decomposed into profit from a forward contract on the underlying asset (asset profit) and what I term pure option profit. The asset profit indicates whether the investor was skillful by buying or selling options on mispriced underlying assets. However, asset profit could also simply be just compensation for bearing risk--a distinction beyond the scope of this paper. Although simulation indicates that the attribution procedure gives an unbiased allocation of the option profit to this source, its standard error is large--a feature common with others' attempts to measure performance of assets.
Language
  • English
Database
  • Gale Academic OneFile
  • Gale General OneFile
  • Gale Expanded Academic
Identifier
  • 71876254

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Charles Sturt University. CSU Library - Electronic Resources (shared). Open to the public 000254919; Full Text Available; ABI/INFORM - Available from 1987 until 2003 Periodical; Journal, magazine, other English
Macquarie University. Macquarie University Library. Open to the public 995643510802171; HG1 .J62; Vol. 36 (2001)-vol. 43 (2008) Periodical; Journal, magazine, other English
Saint Ignatius' College, Riverview. Christopher Brennan Library. Not open to the public Periodical; Journal, magazine, other English
Shore School. Boer War Contingent Memorial Library. Not open to the public Periodical; Journal, magazine, other English
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State Library of NSW. Open to the public N332.05/6; Vol. 25 no. 1 (Mar. 1990)-v. 43, no. 4 (Dec. 2008), N332.05/6 Periodical; Journal, magazine, other English
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Griffith University. Griffith University Library. Open to the public .b16598143; Electronic Resource : Publ. may restrict Doc. Del. Periodical; Journal, magazine, other English
James Cook University. Townsville Campus Library. Open to the public Vol. 42, no. 1 - v.44, no. 6; 2007 - 2009 Periodical; Journal, magazine, other English
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CSIRO. Library Services. Not open to the public 374956; Online access. Available for document delivery. Restrictions apply.; Vol. 22 (1987)- Periodical; Journal, magazine, other English
Deakin University. Deakin University Library. Open to the public 22P00006; GLG v.13(1978)-34(1999) Periodical; Journal, magazine, other English
Mentone Girls' Grammar School. Kerferd Library . Not open to the public Held. Not for ILL. Periodical; Journal, magazine, other English
Monash University. Monash University Library. Open to the public 993890601751; 332.05 J86.2; v. 1 (1966) to v. 46 (2011); OS; YOS-SER Periodical; Journal, magazine, other English
National Gallery of Victoria. The Shaw Research Library. May not be open to the public Held. Not for ILL. Periodical; Journal, magazine, other English
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