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4,000 | Asset Allocation and Risk Assessment with Gross Exposure Constraints for Vast Portfolios | q-fin.PM | Markowitz (1952, 1959) laid down the ground-breaking work on the
mean-variance analysis. Under his framework, the theoretical optimal allocation
vector can be very different from the estimated one for large portfolios due to
the intrinsic difficulty of estimating a vast covariance matrix and return
vector. This can res... | finance |
4,001 | Evaluating the performance of adapting trading strategies with different memory lengths | q-fin.PM | We propose a prediction model based on the minority game in which traders
continuously evaluate a complete set of trading strategies with different
memory lengths using the strategies' past performance. Based on the chosen
trading strategy they determine their prediction of the movement for the
following time period of... | finance |
4,002 | Application of the Kelly Criterion to Ornstein-Uhlenbeck Processes | q-fin.PM | In this paper, we study the Kelly criterion in the continuous time framework
building on the work of E.O. Thorp and others. The existence of an optimal
strategy is proven in a general setting and the corresponding optimal wealth
process is found. A simple formula is provided for calculating the optimal
portfolio for a ... | finance |
4,003 | La prime de risque dans un cadre international : le risque de change est-il apprécié ? | q-fin.PM | In this article, we investigate whether exchange rate risk is priced. We use
a multivariate GARCH-in-Mean specification and test alternative conditional
international CAPM versions. Our results support strongly the international
asset-pricing model that includes exchange rate risk for both developed and
emerging stock ... | finance |
4,004 | Jump-Diffusion Risk-Sensitive Asset Management | q-fin.PM | This paper considers a portfolio optimization problem in which asset prices
are represented by SDEs driven by Brownian motion and a Poisson random measure,
with drifts that are functions of an auxiliary diffusion 'factor' process. The
criterion, following earlier work by Bielecki, Pliska, Nagai and others, is
risk-sens... | finance |
4,005 | Continuous-Time Markowitz's Model with Transaction Costs | q-fin.PM | A continuous-time Markowitz's mean-variance portfolio selection problem is
studied in a market with one stock, one bond, and proportional transaction
costs. This is a singular stochastic control problem,inherently in a finite
time horizon. With a series of transformations, the problem is turned into a
so-called double ... | finance |
4,006 | The premium of dynamic trading | q-fin.PM | It is well established that in a market with inclusion of a risk-free asset
the single-period mean-variance efficient frontier is a straight line tangent
to the risky region, a fact that is the very foundation of the classical CAPM.
In this paper, it is shown that in a continuous-time market where the risky
prices are ... | finance |
4,007 | Global risk minimization in financial markets | q-fin.PM | Recurring international financial crises have adverse socioeconomic effects
and demand novel regulatory instruments or strategies for risk management and
market stabilization. However, the complex web of market interactions often
impedes rational decisions that would absolutely minimize the risk. Here we
show that, for... | finance |
4,008 | Optimal investment with inside information and parameter uncertainty | q-fin.PM | This paper has been withdrawn by the authors pending corrections. | finance |
4,009 | Mutual Fund Theorem for continuous time markets with random coefficients | q-fin.PM | We study the optimal investment problem for a continuous time incomplete
market model such that the risk-free rate, the appreciation rates and the
volatility of the stocks are all random; they are assumed to be independent
from the driving Brownian motion, and they are supposed to be currently
observable. It is shown t... | finance |
4,010 | Existence of Shadow Prices in Finite Probability Spaces | q-fin.PM | A shadow price is a process lying within the bid/ask prices of a market with
proportional transaction costs, such that maximizing expected utility from
consumption in the frictionless market with this price process leads to the
same maximal utility as in the original market with transaction costs. For
finite probabilit... | finance |
4,011 | Jump-Diffusion Risk-Sensitive Asset Management I: Diffusion Factor Model | q-fin.PM | This paper considers a portfolio optimization problem in which asset prices
are represented by SDEs driven by Brownian motion and a Poisson random measure,
with drifts that are functions of an auxiliary diffusion factor process. The
criterion, following earlier work by Bielecki, Pliska, Nagai and others, is
risk-sensit... | finance |
4,012 | Rentes en cours de service : un nouveau critère d'allocation d'actif | q-fin.PM | The aim of this paper is to compare two asset allocation methods for a
pension scheme during the decumulation phase in the simplified portfolio
selection between a risky asset following a geometric Brownian motion and a
riskless asset. The two asset allocation criteria are the ruin probability of
the insurance company ... | finance |
4,013 | Risk Sensitive Investment Management with Affine Processes: a Viscosity Approach | q-fin.PM | In this paper, we extend the jump-diffusion model proposed by Davis and Lleo
to include jumps in asset prices as well as valuation factors. The criterion,
following earlier work by Bielecki, Pliska, Nagai and others, is risk-sensitive
optimization (equivalent to maximizing the expected growth rate subject to a
constrai... | finance |
4,014 | Utility Maximization of an Indivisible Market with Transaction Costs | q-fin.PM | This work takes up the challenges of utility maximization problem when the
market is indivisible and the transaction costs are included. First there is a
so-called solvency region given by the minimum margin requirement in the
problem formulation. Then the associated utility maximization is formulated as
an optimal swi... | finance |
4,015 | Horizon dependence of utility optimizers in incomplete models | q-fin.PM | This paper studies the utility maximization problem with changing time
horizons in the incomplete Brownian setting. We first show that the primal
value function and the optimal terminal wealth are continuous with respect to
the time horizon $T$. Secondly, we exemplify that the expected utility stemming
from applying th... | finance |
4,016 | Transaction fees and optimal rebalancing in the growth-optimal portfolio | q-fin.PM | The growth-optimal portfolio optimization strategy pioneered by Kelly is
based on constant portfolio rebalancing which makes it sensitive to transaction
fees. We examine the effect of fees on an example of a risky asset with a
binary return distribution and show that the fees may give rise to an optimal
period of portf... | finance |
4,017 | Fully Flexible Views: Theory and Practice | q-fin.PM | We propose a unified methodology to input non-linear views from any number of
users in fully general non-normal markets, and perform, among others,
stress-testing, scenario analysis, and ranking allocation. We walk the reader
through the theory and we detail an extremely efficient algorithm to easily
implement this met... | finance |
4,018 | Utility theory front to back - inferring utility from agents' choices | q-fin.PM | We pursue an inverse approach to utility theory and consumption & investment
problems. Instead of specifying an agent's utility function and deriving her
actions, we assume we observe her actions (i.e. her consumption and investment
strategies) and ask if it is possible to derive a utility function for which
the observ... | finance |
4,019 | Measuring Portfolio Diversification | q-fin.PM | In the market place, diversification reduces risk and provides protection
against extreme events by ensuring that one is not overly exposed to individual
occurrences. We argue that diversification is best measured by characteristics
of the combined portfolio of assets and introduce a measure based on the
information en... | finance |
4,020 | Hedging of Game Options With the Presence of Transaction Costs | q-fin.PM | We study the problem of super-replication for game options under proportional
transaction costs. We consider a multidimensional continuous time model, in
which the discounted stock price process satisfies the conditional full support
property. We show that the super-replication price is the cheapest cost of a
trivial s... | finance |
4,021 | Notional portfolios and normalized linear returns | q-fin.PM | The vector of periodic, compound returns of a typical investment portfolio is
almost never a convex combination of the return vectors of the securities in
the portfolio. As a result the ex post version of Harry Markowitz's "standard
mean-variance portfolio selection model" does not apply to compound return
data. We pro... | finance |
4,022 | Dynamic Portfolio Optimization with a Defaultable Security and Regime Switching | q-fin.PM | We consider a portfolio optimization problem in a defaultable market with
finitely-many economical regimes, where the investor can dynamically allocate
her wealth among a defaultable bond, a stock, and a money market account. The
market coefficients are assumed to depend on the market regime in place, which
is modeled ... | finance |
4,023 | Necessary and sufficient conditions in the problem of optimal investment with intermediate consumption | q-fin.PM | We consider a problem of optimal investment with intermediate consumption in
the framework of an incomplete semimartingale model of a financial market. We
show that a necessary and sufficient condition for the validity of key
assertions of the theory is that the value functions of the primal and dual
problems are finit... | finance |
4,024 | Constructing the Best Trading Strategy: A New General Framework | q-fin.PM | We introduce a new general framework for constructing the best trading
strategy for a given historical indicator. We construct the unique trading
strategy with the highest expected return. This optimal strategy may be
implemented directly, or its expected return may be used as a benchmark to
evaluate how far away from ... | finance |
4,025 | Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle | q-fin.PM | Diversification return is an incremental return earned by a rebalanced
portfolio of assets. The diversification return of a rebalanced portfolio is
often incorrectly ascribed to a reduction in variance. We argue that the
underlying source of the diversification return is the rebalancing, which
forces the investor to se... | finance |
4,026 | Optimal investment with intermediate consumption and random endowment | q-fin.PM | We consider a problem of optimal investment with intermediate consumption and
random endowment in an incomplete semimartingale model of a financial market.
We establish the key assertions of the utility maximization theory assuming
that both primal and dual value functions are finite in the interiors of their
domains a... | finance |
4,027 | Suitability of using technical indicators as potential strategies within intelligent trading systems | q-fin.PM | The potential of machine learning to automate and control nonlinear, complex
systems is well established. These same techniques have always presented
potential for use in the investment arena, specifically for the managing of
equity portfolios. In this paper, the opportunity for such exploitation is
investigated throug... | finance |
4,028 | Portfolio optimisation under non-linear drawdown constraints in a semimartingale financial model | q-fin.PM | A drawdown constraint forces the current wealth to remain above a given
function of its maximum to date. We consider the portfolio optimisation problem
of maximising the long-term growth rate of the expected utility of wealth
subject to a drawdown constraint, as in the original setup of Grossman and Zhou
(1993). We wor... | finance |
4,029 | An analytical performance comparison of exchanged traded funds with index funds: 2002-2010 | q-fin.PM | Exchange Traded Funds (ETFs) have been gaining increasing popularity in the
investment community as is evidenced by the high growth both in the number of
ETFs and their net assets since 2000. As ETFs are in nature similar to index
mutual funds, in this paper we examined if this growing demand for ETFs can be
explained ... | finance |
4,030 | Multicurrency advisor based on the NSW model. Detailed description and perspectives | q-fin.PM | Flexible algorithm of multicurrency trade on Forex market has been built on
the grounds of non-linear stochastic wavelets (NSW) model. Probability of the
loss-free trade has been evaluated. Results of the algorithm's real-time
testing and issues of the algorithm's development are discussed. | finance |
4,031 | The Nature of Alpha | q-fin.PM | We suggest an empirical model of investment strategy returns which elucidates
the importance of non-Gaussian features, such as time-varying volatility,
asymmetry and fat tails, in explaining the level of expected returns.
Estimating the model on the (former) Lehman Brothers Hedge Fund Index data, we
demonstrate that th... | finance |
4,032 | On the game interpretation of a shadow price process in utility maximization problems under transaction costs | q-fin.PM | To any utility maximization problem under transaction costs one can assign a
frictionless model with a price process $S^*$, lying in the bid/ask price
interval $[\underline S, \bar{S}]$. Such process $S^*$ is called a \emph{shadow
price} if it provides the same optimal utility value as in the original model
with bid-as... | finance |
4,033 | Asymptotic Analysis for Optimal Investment in Finite Time with Transaction Costs | q-fin.PM | We consider an agent who invests in a stock and a money market account with
the goal of maximizing the utility of his investment at the final time T in the
presence of a proportional transaction cost. The utility function considered is
power utility. We provide a heuristic and a rigorous derivation of the
asymptotic ex... | finance |
4,034 | Building portfolios of stocks in the São Paulo Stock Exchange using Random Matrix Theory | q-fin.PM | By using Random Matrix Theory, we build covariance matrices between stocks of
the BM&F-Bovespa (Bolsa de Valores, Mercadorias e Futuros de S\~ao Paulo) which
are cleaned of some of the noise due to the complex interactions between the
many stocks and the finiteness of available data. We also use a regression
model in o... | finance |
4,035 | Optimal Trading with Linear Costs | q-fin.PM | We consider the problem of the optimal trading strategy in the presence of
linear costs, and with a strict cap on the allowed position in the market.
Using Bellman's backward recursion method, we show that the optimal strategy is
to switch between the maximum allowed long position and the maximum allowed
short position... | finance |
4,036 | Transaction Costs, Shadow Prices, and Duality in Discrete Time | q-fin.PM | For portfolio choice problems with proportional transaction costs, we discuss
whether or not there exists a "shadow price", i.e., a least favorable
frictionless market extension leading to the same optimal strategy and utility.
By means of an explicit counter-example, we show that shadow prices may fail
to exist even... | finance |
4,037 | Life Insurance Purchasing to Maximize Utility of Household Consumption | q-fin.PM | We determine the optimal amount of life insurance for a household of two wage
earners. We consider the simple case of exponential utility, thereby removing
wealth as a factor in buying life insurance, while retaining the relationship
among life insurance, income, and the probability of dying and thus losing that
income... | finance |
4,038 | Stability of the exponential utility maximization problem with respect to preferences | q-fin.PM | This paper studies stability of the exponential utility maximization when
there are small variations on agent's utility function. Two settings are
considered. First, in a general semimartingale model where random endowments
are present, a sequence of utilities defined on R converges to the exponential
utility. Under a ... | finance |
4,039 | The Long Neglected Critically Leveraged Portfolio | q-fin.PM | We show that the efficient frontier for a portfolio in which short positions
precisely offset the long ones is composed of a pair of straight lines through
the origin of the risk-return plane. This unique but important case has been
overlooked because the original formulation of the mean-variance model by
Markowitz as ... | finance |
4,040 | Can Metropolitan Housing Risk be Diversified? A Cautionary Tale from the Recent Boom and Bust | q-fin.PM | Geographic diversification is fundamental to risk mitigation among investors
and insurers of housing, mortgages, and mortgage-related derivatives. To
characterize diversification potential, we provide estimates of integration,
spatial correlation, and contagion among US metropolitan housing markets.
Results reveal a hi... | finance |
4,041 | Diffusion-based models for financial markets without martingale measures | q-fin.PM | We consider a general class of diffusion-based models and show that, even in
the absence of an Equivalent Local Martingale Measure, the financial market may
still be viable, in the sense that strong forms of arbitrage are excluded and
portfolio optimisation problems can be meaningfully solved. Relying partly on
the rec... | finance |
4,042 | Utility Maximization in a Binomial Model with transaction costs: a Duality Approach Based on the Shadow Price Process | q-fin.PM | We consider the problem of optimizing the expected logarithmic utility of the
value of a portfolio in a binomial model with proportional transaction costs
with a long time horizon. By duality methods, we can find expressions for the
boundaries of the no-trade-region and the asymptotic optimal growth rate, which
can be ... | finance |
4,043 | Maximising Survival, Growth, and Goal Reaching Under Borrowing Constraints | q-fin.PM | In this paper, we consider three problems related to survival, growth, and
goal reaching maximization of an investment portfolio with proportional net
cash flow. We solve the problems in a market constrained due to borrowing
prohibition. To solve the problems, we first construct an auxiliary market and
then apply the d... | finance |
4,044 | Portfolio Choice in Markets with Contagion | q-fin.PM | We consider the problem of optimal investment and consumption in a class of
multidimensional jump-diffusion models in which asset prices are subject to
mutually exciting jump processes. This captures a type of contagion where each
downward jump in an asset's price results in increased likelihood of further
jumps, both ... | finance |
4,045 | The Merton Problem with a Drawdown Constraint on Consumption | q-fin.PM | In this paper, we work in the framework of the Merton problem but we impose a
drawdown constraint on the consumption process. This means that consumption can
never fall below a fixed proportion of the running maximum of past consumption.
In terms of economic motivation, this constraint represents a type of habit
format... | finance |
4,046 | Impact of time illiquidity in a mixed market without full observation | q-fin.PM | We study a problem of optimal investment/consumption over an infinite horizon
in a market consisting of two possibly correlated assets: one liquid and one
illiquid. The liquid asset is observed and can be traded continuously, while
the illiquid one can be traded only at discrete random times corresponding to
the jumps ... | finance |
4,047 | Viscosity characterization of the value function of an investment-consumption problem in presence of illiquid assets | q-fin.PM | We study a problem of optimal investment/consumption over an infinite horizon
in a market consisting of a liquid and an illiquid asset. The liquid asset is
observed and can be traded continuously, while the illiquid one can only be
traded and observed at discrete random times corresponding to the jumps of a
Poisson pro... | finance |
4,048 | Generalizations of Functionally Generated Portfolios with Applications to Statistical Arbitrage | q-fin.PM | The theory of functionally generated portfolios (FGPs) is an aspect of the
continuous-time, continuous-path Stochastic Portfolio Theory of Robert
Fernholz. FGPs have been formulated to yield a master equation - a description
of their return relative to a passive (buy-and-hold) benchmark portfolio
serving as the num\'er... | finance |
4,049 | Smooth Value Function with Applications in Wealth-CVaR Efficient Portfolio and Turnpike Property | q-fin.PM | In this paper we continue the study of Bian-Miao-Zheng (2011) and extend the
results there to a more general class of utility functions which may be bounded
and non-strictly-concave and show that there is a classical solution to the HJB
equation with the dual control method. We then apply the results to study the
effic... | finance |
4,050 | Optimal Liquidation in a Finite Time Regime Switching Model with Permanent and Temporary Pricing Impact | q-fin.PM | In this paper we discuss the optimal liquidation over a finite time horizon
until the exit time. The drift and diffusion terms of the asset price are
general functions depending on all variables including control and market
regime. There is also a local nonlinear transaction cost associated to the
liquidation. The mode... | finance |
4,051 | Gambling in contests with regret | q-fin.PM | This paper discusses the gambling contest introduced in Seel & Strack
(Gambling in contests, Discussion Paper Series of SFB/TR 15 Governance and the
Efficiency of Economic Systems 375, Mar 2012.) and considers the impact of
adding a penalty associated with failure to follow a winning strategy.
The Seel & Strack model... | finance |
4,052 | Value-Based Inventory Management | q-fin.PM | The basic financial purpose of a firm is to maximize its value. An inventory
management system should also contribute to realization of this basic aim. Many
current asset management models currently found in financial management
literature were constructed with the assumption of book profit maximization as
basic aim. H... | finance |
4,053 | Theory of Performance Participation Strategies | q-fin.PM | The purpose of this article is to introduce, analyze and compare two
performance participation methods based on a portfolio consisting of two risky
assets: Option-Based Performance Participation (OBPP) and Constant Proportion
Performance Participation (CPPP). By generalizing the provided guarantee to a
participation in... | finance |
4,054 | Optimal investment and price dependence in a semi-static market | q-fin.PM | This paper studies the problem of maximizing expected utility from terminal
wealth in a semi-static market composed of derivative securities, which we
assume can be traded only at time zero, and of stocks, which can be traded
continuously in time and are modeled as locally-bounded semi-martingales.
Using a general ut... | finance |
4,055 | Portfolio Optimization under Partial Information with Expert Opinions: a Dynamic Programming Approach | q-fin.PM | This paper investigates optimal portfolio strategies in a market where the
drift is driven by an unobserved Markov chain. Information on the state of this
chain is obtained from stock prices and expert opinions in the form of signals
at random discrete time points. As in Frey et al. (2012), Int. J. Theor. Appl.
Finance... | finance |
4,056 | Dynamic Credit Investment in Partially Observed Markets | q-fin.PM | We consider the problem of maximizing expected utility for a power investor
who can allocate his wealth in a stock, a defaultable security, and a money
market account. The dynamics of these security prices are governed by geometric
Brownian motions modulated by a hidden continuous time finite state Markov
chain. We red... | finance |
4,057 | A liability tracking approach to long term management of pension funds | q-fin.PM | We propose a long term portfolio management method which takes into account a
liability. Our approach is based on the LQG (Linear, Quadratic cost, Gaussian)
control problem framework and then the optimal portfolio strategy hedges the
liability by directly tracking a benchmark process which represents the
liability. Two... | finance |
4,058 | Optimal initiation of a GLWB in a variable annuity: no arbitrage approach | q-fin.PM | This paper offers a financial economic perspective on the optimal time (and
age) at which the owner of a Variable Annuity (VA) policy with a Guaranteed
Living Withdrawal Benefit (GLWB) rider should initiate guaranteed lifetime
income payments. We abstract from utility, bequest and consumption preference
issues by treat... | finance |
4,059 | On the Dividend Strategies with Non-Exponential Discounting | q-fin.PM | In this paper, we study the dividend strategies for a shareholder with
non-constant discount rate in a diffusion risk model. We assume that the
dividends can only be paid at a bounded rate and restrict ourselves to the
Markov strategies. This is a time inconsistent control problem. The extended
HJB equation is given an... | finance |
4,060 | Optimal portfolios of a long-term investor with floor or drawdown constraints | q-fin.PM | We study the portfolio selection problem of a long-run investor who is
maximising the asymptotic growth rate of her expected utility. We show that,
somewhat surprisingly, it is essentially not affected by introduction of a
floor constraint which requires the wealth process to dominate a given
benchmark at all times. We... | finance |
4,061 | Robust Portfolios and Weak Incentives in Long-Run Investments | q-fin.PM | When the planning horizon is long, and the safe asset grows indefinitely,
isoelastic portfolios are nearly optimal for investors who are close to
isoelastic for high wealth, and not too risk averse for low wealth. We prove
this result in a general arbitrage-free, frictionless, semimartingale model. As
a consequence, op... | finance |
4,062 | Hedging and Leveraging: Principal Portfolios of the Capital Asset Pricing Model | q-fin.PM | The principal portfolios of the standard Capital Asset Pricing Model (CAPM)
are analyzed and found to have remarkable hedging and leveraging properties.
Principal portfolios implement a recasting of any correlated asset set of N
risky securities into an equivalent but uncorrelated set when short sales are
allowed. Whil... | finance |
4,063 | Portfolio Optimization in R | q-fin.PM | We consider the problem of finding the efficient frontier associated with the
risk-return portfolio optimization model. We derive the analytical expression
of the efficient frontier for a portfolio of N risky assets, and for the case
when a risk-free asset is added to the model. Also, we provide an R
implementation, an... | finance |
4,064 | Transformation Method for Solving Hamilton-Jacobi-Bellman Equation for Constrained Dynamic Stochastic Optimal Allocation Problem | q-fin.PM | In this paper we propose and analyze a method based on the Riccati
transformation for solving the evolutionary Hamilton-Jacobi-Bellman equation
arising from the stochastic dynamic optimal allocation problem. We show how the
fully nonlinear Hamilton-Jacobi-Bellman equation can be transformed into a
quasi-linear paraboli... | finance |
4,065 | Asset Allocation under the Basel Accord Risk Measures | q-fin.PM | Financial institutions are currently required to meet more stringent capital
requirements than they were before the recent financial crisis; in particular,
the capital requirement for a large bank's trading book under the Basel 2.5
Accord more than doubles that under the Basel II Accord. The significant
increase in cap... | finance |
4,066 | Continuous-Time Portfolio Optimisation for a Behavioural Investor with Bounded Utility on Gains | q-fin.PM | This paper examines an optimal investment problem in a continuous-time
(essentially) complete financial market with a finite horizon. We deal with an
investor who behaves consistently with principles of Cumulative Prospect
Theory, and whose utility function on gains is bounded above. The
well-posedness of the optimisat... | finance |
4,067 | Portfolio Optimization under Small Transaction Costs: a Convex Duality Approach | q-fin.PM | We consider an investor with constant absolute risk aversion who trades a
risky asset with general Ito dynamics, in the presence of small proportional
transaction costs. Kallsen and Muhle-Karbe (2012) formally derived the
leading-order optimal trading policy and the associated welfare impact of
transaction costs. In th... | finance |
4,068 | Asymptotic analysis for Merton's problem with transaction costs in power utility case | q-fin.PM | We revisit the optimal investment and consumption problem with proportional
transaction costs. We prove that both the value function and the slopes of the
lines demarcating the no-trading region are analytic functions of cube root of
the transaction cost parameter. Also, we can explicitly calculate the
coefficients of ... | finance |
4,069 | Seven Sins in Portfolio Optimization | q-fin.PM | Although modern portfolio theory has been in existence for over 60 years,
fund managers often struggle to get its models to produce reliable portfolio
allocations without strongly constraining the decision vector by tight bands of
strategic allocation targets. The two main root causes to this problem are
inadequate par... | finance |
4,070 | The Kelly growth optimal strategy with a stop-loss rule | q-fin.PM | From the Hamilton-Jacobi-Bellman equation for the value function we derive a
non-linear partial differential equation for the optimal portfolio strategy
(the dynamic control). The equation is general in the sense that it does not
depend on the terminal utility and provides additional analytical insight for
some optimal... | finance |
4,071 | Time--consistent investment under model uncertainty: the robust forward criteria | q-fin.PM | We combine forward investment performance processes and ambiguity averse
portfolio selection. We introduce the notion of robust forward criteria which
addresses the issues of ambiguity in model specification and in preferences and
investment horizon specification. It describes the evolution of time-consistent
ambiguity... | finance |
4,072 | A Fast Algorithm for Computing High-dimensional Risk Parity Portfolios | q-fin.PM | In this paper we propose a cyclical coordinate descent (CCD) algorithm for
solving high dimensional risk parity problems. We show that this algorithm
converges and is very fast even with large covariance matrices (n > 500).
Comparison with existing algorithms also shows that it is one of the most
efficient algorithms. | finance |
4,073 | A New Characterization of Comonotonicity and its Application in Behavioral Finance | q-fin.PM | It is well-known that an $\mathbb{R}$-valued random vector $(X_1, X_2,
\cdots, X_n)$ is comonotonic if and only if $(X_1, X_2, \cdots, X_n)$ and
$(Q_1(U), Q_2(U),\cdots, Q_n(U))$ coincide \emph{in distribution}, for
\emph{any} random variable $U$ uniformly distributed on the unit interval
$(0,1)$, where $Q_k(\cdot)$ ar... | finance |
4,074 | Optimal Strategies for a Long-Term Static Investor | q-fin.PM | The optimal strategies for a long-term static investor are studied. Given a
portfolio of a stock and a bond, we derive the optimal allocation of the
capitols to maximize the expected long-term growth rate of a utility function
of the wealth. When the bond has constant interest rate, three models for the
underlying stoc... | finance |
4,075 | Risk- and ambiguity-averse portfolio optimization with quasiconcave utility functionals | q-fin.PM | Motivated by recent axiomatic developments, we study the risk- and
ambiguity-averse investment problem where trading takes place over a fixed
finite horizon and terminal payoffs are evaluated according to a criterion
defined in terms of a quasiconcave utility functional. We extend to the present
setting certain existen... | finance |
4,076 | Credit Portfolio Management in a Turning Rates Environment | q-fin.PM | We give a detailed account of correlations between credit sector/quality and
treasury curve factors, using the robust framework of the Barclays POINT Global
Risk Model. Consistent with earlier studies, we find a strong negative
correlation between sector spreads and rate shifts. However, we also observe
that the correl... | finance |
4,077 | Optimal Investment with Transaction Costs and Stochastic Volatility | q-fin.PM | Two major financial market complexities are transaction costs and uncertain
volatility, and we analyze their joint impact on the problem of portfolio
optimization. When volatility is constant, the transaction costs optimal
investment problem has a long history, especially in the use of asymptotic
approximations when th... | finance |
4,078 | Dynamic Mean-LPM and Mean-CVaR Portfolio Optimization in Continuous-time | q-fin.PM | Instead of controlling "symmetric" risks measured by central moments of
investment return or terminal wealth, more and more portfolio models have
shifted their focus to manage "asymmetric" downside risks that the investment
return is below certain threshold. Among the existing downside risk measures,
the lower-partial ... | finance |
4,079 | Purchasing Life Insurance to Reach a Bequest Goal | q-fin.PM | We determine how an individual can use life insurance to meet a bequest goal.
We assume that the individual's consumption is met by an income, such as a
pension, life annuity, or Social Security. Then, we consider the wealth that
the individual wants to devote towards heirs (separate from any wealth related
to the afor... | finance |
4,080 | Expert Opinions and Logarithmic Utility Maximization in a Market with Gaussian Drift | q-fin.PM | This paper investigates optimal portfolio strategies in a financial market
where the drift of the stock returns is driven by an unobserved Gaussian mean
reverting process. Information on this process is obtained from observing stock
returns and expert opinions. The latter provide at discrete time points an
unbiased est... | finance |
4,081 | Introduction to Risk Parity and Budgeting | q-fin.PM | Although portfolio management didn't change much during the 40 years after
the seminal works of Markowitz and Sharpe, the development of risk budgeting
techniques marked an important milestone in the deepening of the relationship
between risk and asset management. Risk parity then became a popular financial
model of in... | finance |
4,082 | Momentum Strategies with L1 Filter | q-fin.PM | In this article, we discuss various implementation of L1 filtering in order
to detect some properties of noisy signals. This filter consists of using a L1
penalty condition in order to obtain the filtered signal composed by a set of
straight trends or steps. This penalty condition, which determines the number
of breaks... | finance |
4,083 | Utility maximization in the large markets | q-fin.PM | In the large financial market, which is described by a model with countably
many traded assets, we formulate the problem of the expected utility
maximization. Assuming that the preferences of an economic agent are modeled
with a stochastic utility and that the consumption occurs according to a
stochastic clock, we obta... | finance |
4,084 | A Note on the Quantile Formulation | q-fin.PM | Many investment models in discrete or continuous-time settings boil down to
maximizing an objective of the quantile function of the decision variable. This
quantile optimization problem is known as the quantile formulation of the
original investment problem. Under certain monotonicity assumptions, several
schemes to so... | finance |
4,085 | Is It Possible to OD on Alpha? | q-fin.PM | It is well known that combining multiple hedge fund alpha streams yields
diversification benefits to the resultant portfolio. Additionally, crossing
trades between different alpha streams reduces transaction costs. As the number
of alpha streams increases, the relative turnover of the portfolio decreases as
more trades... | finance |
4,086 | Signal-wise performance attribution for constrained portfolio optimisation | q-fin.PM | Performance analysis, from the external point of view of a client who would
only have access to returns and holdings of a fund, evolved towards exact
attribution made in the context of portfolio optimisation, which is the
internal point of view of a manager controlling all the parameters of this
optimisation. Attributi... | finance |
4,087 | An Optimal Consumption-Investment Model with Constraint on Consumption | q-fin.PM | A continuous-time consumption-investment model with constraint is considered
for a small investor whose decisions are the consumption rate and the
allocation of wealth to a risk-free and a risky asset with logarithmic Brownian
motion fluctuations. The consumption rate is subject to an upper bound
constraint which linea... | finance |
4,088 | Optimal investment under behavioural criteria -- a dual approach | q-fin.PM | We consider a discrete-time, generically incomplete market model and a
behavioural investor with power-like utility and distortion functions. The
existence of optimal strategies in this setting has been shown in a previous
paper under certain conditions on the parameters of these power functions.
In the present paper... | finance |
4,089 | Optimal Portfolio Problem Using Entropic Value at Risk: When the Underlying Distribution is Non-Elliptical | q-fin.PM | This paper is devoted to study the optimal portfolio problem. Harry
Markowitz's Ph.D. thesis prepared the ground for the mathematical theory of
finance. In modern portfolio theory, we typically find asset returns that are
modeled by a random variable with an elliptical distribution and the notion of
portfolio risk is d... | finance |
4,090 | Active extension portfolio optimization with non-convex risk measures using metaheuristics | q-fin.PM | We consider the optimization of active extension portfolios. For this
purpose, the optimization problem is rewritten as a stochastic programming
model and solved using a clever multi-start local search heuristic, which turns
out to provide stable solutions. The heuristic solutions are compared to
optimization results o... | finance |
4,091 | Portfolio optimization in the case of an asset with a given liquidation time distribution | q-fin.PM | Management of the portfolios containing low liquidity assets is a tedious
problem. The buyer proposes the price that can differ greatly from the paper
value estimated by the seller, the seller, on the other hand, can not liquidate
his portfolio instantly and waits for a more favorable offer. To minimize
losses in this ... | finance |
4,092 | Risk-sensitive investment in a finite-factor model | q-fin.PM | A new jump diffusion regime-switching model is introduced, which allows for
linking jumps in asset prices with regime changes. We prove the existence and
uniqueness of the solution to the risk-sensitive asset management criterion
maximisation problem in this setting. We provide an ODE for the optimal value
function, wh... | finance |
4,093 | Mean-Reversion and Optimization | q-fin.PM | The purpose of these notes is to provide a systematic quantitative framework
- in what is intended to be a "pedagogical" fashion - for discussing
mean-reversion and optimization. We start with pair trading and add complexity
by following the sequence "mean-reversion via demeaning -> regression ->
weighted regression ->... | finance |
4,094 | Bounds on Portfolio Quality | q-fin.PM | The signal-noise ratio of a portfolio of p assets, its expected return
divided by its risk, is couched as an estimation problem on the sphere. When
the portfolio is built using noisy data, the expected value of the signal-noise
ratio is bounded from above via a Cramer-Rao bound, for the case of Gaussian
returns. The bo... | finance |
4,095 | An expansion in the model space in the context of utility maximization | q-fin.PM | In the framework of an incomplete financial market where the stock price
dynamics are modeled by a continuous semimartingale (not necessarily Markovian)
an explicit second-order expansion formula for the power investor's value
function - seen as a function of the underlying market price of risk process -
is provided. T... | finance |
4,096 | Dynamic Investment Portfolio Optimization under Constraints in the Financial Market with Regime Switching using Model Predictive Control | q-fin.PM | In this work, we consider the optimal portfolio selection problem under hard
constraints on trading volume amounts when the dynamics of the risky asset
returns are governed by a discrete-time approximation of the Markov-modulated
geometric Brownian motion. The states of Markov chain are interpreted as the
states of an ... | finance |
4,097 | Portfolio Optimization in the Financial Market with Correlated Returns under Constraints, Transaction Costs and Different Rates for Borrowing and Lending | q-fin.PM | In this work, we consider the optimal portfolio selection problem under hard
constraints on trading amounts, transaction costs and different rates for
borrowing and lending when the risky asset returns are serially correlated. No
assumptions about the correlation structure between different time points or
about the dis... | finance |
4,098 | Optimal Allocation of Trend Following Strategies | q-fin.PM | We consider a portfolio allocation problem for trend following (TF)
strategies on multiple correlated assets. Under simplifying assumptions of a
Gaussian market and linear TF strategies, we derive analytical formulas for the
mean and variance of the portfolio return. We construct then the optimal
portfolio that maximiz... | finance |
4,099 | Optimising Credit Portfolio Using a Quadratic Nonlinear Projection Method | q-fin.PM | A novel optimisation framework through quadratic nonlinear projection is
introduced for credit portfolio when the portfolio risk is measured by
Conditional Value-at-Risk (CVaR). The whole optimisation procedure to search
toward the optimal portfolio state is conducted by a series of single-step
optimisations under the ... | finance |
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