Related papers: Diversification Return, Portfolio Rebalancing, and…
In financial asset management, choosing a portfolio requires balancing returns, risk, exposure, liquidity, volatility and other factors. These concerns are difficult to compare explicitly, with many asset managers using an intuitive or…
We study mean-risk optimal portfolio problems where risk is measured by Recovery Average Value at Risk, a prominent example in the class of recovery risk measures. We establish existence results in the situation where the joint distribution…
In this paper, we consider the problem of optimization of a portfolio consisting of securities. An investor with an initial capital, is interested in constructing a portfolio of securities. If the prices of securities change, the investor…
Managing a portfolio to a risk model can tilt the portfolio toward weaknesses of the model. As a result, the optimized portfolio acquires downside exposure to uncertainty in the model itself, what we call "second order risk." We propose a…
The only input to attain the portfolio weights of global minimum variance portfolio (GMVP) is the covariance matrix of returns of assets being considered for investment. Since the population covariance matrix is not known, investors use…
Using a family of modified Weibull distributions, encompassing both sub-exponentials and super-exponentials, to parameterize the marginal distributions of asset returns and their natural multivariate generalizations, we give exact formulas…
Excessive leverage, i.e. the abuse of debt financing, is considered one of the primary factors in the default of financial institutions. Systemic risk results from correlations between individual default probabilities that cannot be…
We provide analytical results for a static portfolio optimization problem with two coherent risk measures. The use of two risk measures is motivated by joint decision-making for portfolio selection where the risk perception of the portfolio…
We consider portfolio optimization in futures markets. We model the entire futures price curve at once as a solution of a stochastic partial differential equation. The agents objective is to maximize her utility from the final wealth when…
When assets are correlated, benefits of investment diversification are reduced. To measure the influence of correlations on investment performance, a new quantity - the effective portfolio size - is proposed and investigated in both…
Accurately predicting stock returns is crucial for effective portfolio management. However, existing methods often overlook a fundamental issue in the market, namely, distribution shifts, making them less practical for predicting future…
Understanding the dependence structure of asset returns is fundamental in risk assessment and is particularly relevant in a portfolio diversification strategy. We propose a clustering approach where evidence accumulated in a multiplicity of…
Against the widely held belief that diversification at banking institutions contributes to the stability of the financial system, Wagner (2010) found that diversification actually makes systemic crisis more likely. While it is true, as…
This paper discusses a novel explanation for asymmetric volatility based on the anchoring behavioral pattern. Anchoring as a heuristic bias causes investors focusing on recent price changes and price levels, which two lead to a belief in…
Following the idea of Bayesian learning via Gaussian mixture model, we organically combine the backward-looking information contained in the historical data and the forward-looking information implied by the market portfolio, which is…
For the past two decades investors have observed long memory and highly correlated behavior of asset classes that does not fit into the framework of Modern Portfolio Theory. Custom correlation and standard deviation estimators consider…
Portfolio construction is the science of balancing reward and risk; it is at the core of modern finance. In this paper, we tackle the question of optimal decision-making within a Bayesian paradigm, starting from a decision-theoretic…
This paper studies the continuous time mean-variance portfolio selection problem with one kind of non-linear wealth dynamics. To deal the expectation constraint, an auxiliary stochastic control problem is firstly solved by two new…
We develop a liquidity-sensitive multivariate volatility framework to improve the estimation of time-varying covariance structures under market frictions. We introduce two novel portfolio-level liquidity measures, liquidity jump and…
Portfolio optimisation typically aims to provide an optimal allocation that minimises risk, at a given return target, by diversifying over different investments. However, the potential scope of such risk diversification can be limited if…