Related papers: Energy, entropy, and arbitrage
In order to better understand the occurrence of phase transitions, we adopt an approach based on the study of energy landscapes: The relation between stationary points of the potential energy landscape of a classical many-particle system…
This paper proposes a portfolio construction framework designed to remain robust under estimation error, non-stationarity, and realistic trading constraints. The methodology combines dynamic asset eligibility, deterministic rebalancing, and…
Utility and risk are two often competing measurements on the investment success. We show that efficient trade-off between these two measurements for investment portfolios happens, in general, on a convex curve in the two dimensional space…
This work proposes a unified framework for portfolio allocation, covering both asset selection and optimization, based on a multiple-hypothesis predict-then-optimize approach. The portfolio is modeled as a structured ensemble, where each…
A parameter method is introduced in order to estimate the relationship among the various variables of a system in equilibrium, where the potential energy functions are incompletely known or the quantum mechanical calculations very…
The role of portfolio construction in the implementation of equity market neutral factors is often underestimated. Taking the classical momentum strategy as an example, we show that one can significantly improve the main strategy's features…
The concept of spectral relative entropy rate is introduced for jointly stationary Gaussian processes. Using classical information-theoretic results, we establish a remarkable connection between time and spectral domain relative entropy…
Designing an optimum portfolio that allocates weights to its constituent stocks in a way that achieves the best trade-off between the return and the risk is a challenging research problem. The classical mean-variance theory of portfolio…
In this article we describe the applications of the relative entropy framework. In particular uniqueness of an entropy solution is proven for a scalar conservation law, using the notion of measure-valued entropy solutions. Further we survey…
This paper develops new mathematical techniques to identify temporal shifts among a collection of US equities partitioned into a new and more detailed set of market sectors. Although conceptually related, our three analyses reveal distinct…
This paper proposes that the mathematical relationship between an entropy distribution and its limit offers some new insight into system performance. This relationship is used to quantify variation among the entities of a system, where…
The idiosyncratic (microscopic) and systemic (macroscopic) components of market structure have been shown to be responsible for the departure of the optimal mean-variance allocation from the heuristic `equally-weighted' portfolio. In this…
We propose a new method of valuation of portfolios and their respective investing strategies. To this end we define a canonical ensemble of portfolios that allows to use the formalism thermodynamics.
We consider the following problem in stochastic portfolio theory. Are there portfolios that are relative arbitrages with respect to the market portfolio over very short periods of time under realistic assumptions? We answer a slightly…
Classical portfolio optimization methods typically determine an optimal capital allocation through the implicit, yet critical, assumption of statistical time-invariance. Such models are inadequate for real-world markets as they employ…
Entropy is a very useful concept from physics that tries to explain how a system behaves from a point of view of the thermodynamics. However, there are two ways to explain entropy, and it depends on if we are studying a microsystem or a…
Volatility, as a primary indicator of financial risk, forms the foundation of classical frameworks such as Markowitz's Portfolio Theory and the Efficient Market Hypothesis (EMH). However, its conventional use rests on assumptions-most…
This paper derives a portfolio decomposition formula when the agent maximizes utility of her wealth at some finite planning horizon. The financial market is complete and consists of multiple risky assets (stocks) plus a risk free asset. The…
We propose a multi-stage stochastic programming model for the optimal participation of energy communities in electricity markets. The multi-stage aspect captures the different times at which variable renewable generation and electricity…
In a fixed time horizon, appropriately executing a large amount of a particular asset -- meaning a considerable portion of the volume traded within this frame -- is challenging. Especially for illiquid or even highly liquid but also highly…