Most portfolio selection rules based on the sample mean and covariance matrix perform poorly out-of-sample. Moreover, there is a growing body of evidence that such optimization rules are not able to beat simple rules of thumb, such as 1/N. Parameter uncertainty has been identified as one major...

We combine risk-neutral densities from equity index options with realized index returns to estimate the market's risk aversion. Starting from a power utility framework with constant risk aversion, we extend it by more flexible stochastic discount factors. We allow for time-varying risk aversion...