Empirical Analysis is the starting point for strategy design. Market behavior is not close to that depicted in classical theory, especially from the perspective of understanding the risk-return trade-offs in option contracts.
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Stochastic Modeling of market micro-structure is undertaken, addressing non-classical findings of empirical analysis. By understanding option contracts under realistic market behavior, prices of options are expressed as option risk premiums. These strike-tenor-asset dependent option risk premiums guide portfolio construction.
Risk Constraints limit the range of parameters for strategy design. Portfolio construction, while informed of the opportunity set, is always subservient to explicitly articulated risk constraints. Traded instruments and configurations are limited to those amenable to such explicit articulations.
Behavioral Interpretation of option risk premiums helps build a qualitative understanding that guides the quantitative design of investment strategy. A multi-asset approach is undertaken to build such an interpretation.
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