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We build a simple model of leveraged asset purchases with margin calls. Investment funds use what is perhaps the most basic financial strategy, called "value investing", i.e. systematically attempting to buy underpriced assets. When funds…
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…
Estimating the covariance of asset returns, i.e., the risk model, is a key component of financial portfolio construction and evaluation. Most risk modeling approaches produce a factor model that decomposes the asset variability into two…
The fundamental principle in Modern Portfolio Theory (MPT) is based on the quantification of the portfolio's risk related to performance. Although MPT has made huge impacts on the investment world and prompted the success and prevalence of…
This paper studies a variation of the continuous-time mean-variance portfolio selection where a tracking-error penalization is added to the mean-variance criterion. The tracking error term penalizes the distance between the allocation…
We consider the issue of solution uniqueness for portfolio optimization problem and its inverse for asset returns with a finite number of possible scenarios. The risk is assessed by deviation measures introduced by [Rockafellar et al.,…
In this paper, we present a method for constructing a (static) portfolio of co-maturing European options whose price sign is determined by the skewness level of the associated implied volatility. This property holds regardless of the…
Using daily returns of the S&P 500 stocks from 2001 to 2011, we perform a backtesting study of the portfolio optimization strategy based on the extreme risk index (ERI). This method uses multivariate extreme value theory to minimize the…
This paper focuses on a dynamic multi-asset mean-variance portfolio selection problem under model uncertainty. We develop a continuous time framework for taking into account ambiguity aversion about both expected return rates and…
Volatility is the language in which finance often describes risk, but it is not the language in which institutions experience risk. Allocators live through drawdowns, liquidity needs, spending rules, rebalance decisions, board oversight,…
We introduce diversified risk parity embedded with various reward-risk measures and more generic allocation rules for portfolio construction. We empirically test the proposed reward-risk parity strategies and compare their performance with…
We argue that spanning large numbers of degrees of freedom in empirical analysis allows better characterizations of effects and thus improves the trustworthiness of conclusions. Our ideas are illustrated in three studies: equity premium…
A so called Zipf analysis portofolio management technique is introduced in order to comprehend the risk and returns. Two portofoios are built each from a well known financial index. The portofolio management is based on two approaches: one…
This paper discusses an alternative explanation for the empirical findings contradicting the positive relationship between risk (variance) and reward (expected return). We show that these contradicting results might be due to the false…
We investigate whether the tails of firm-level idiosyncratic return distributions are driven by common shocks. We use quantile factor analysis to extract such common idiosyncratic quantile factors with asymmetric pricing effects and we find…
We consider a discrete-time dividend payout problem with risk sensitive shareholders. It is assumed that they are equipped with a risk aversion coefficient and construct their discounted payoff with the help of the exponential premium…
High precision analytical approximation is proposed for variance-covariance based risk allocation in a portfolio of risky assets. A general case of a single-period multi-factor Merton-type model with stochastic recovery is considered. The…
We find that the CAPM fails to explain the small firm effect even if its non-parametric form is used which allows time-varying risk and non-linearity in the pricing function. Furthermore, the linearity of the CAPM can be rejected, thus the…
The downside risk of a portfolio of (equity)assets is generally substantially higher than the downside risk of its components. In particular in times of crises when assets tend to have high correlation, the understanding of this difference…
To achieve robustness of risk across different assets, risk parity investing rules, a particular state of risk contributions, have grown in popularity over the previous few decades. To generalize the concept of risk contribution from the…