Related papers: Misspecified Recovery
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…
Trading styles can be classified into either trend-following or mean-reverting. If the net trading style is trend-following the traded asset is more likely to move in the same direction it moved previously (the opposite is true if the net…
Technical trading rules and linear regressive models are often used by practitioners to find trends in financial data. However, these models are unsuited to find non-linearly separable patterns. We propose a decision tree forecasting model…
Factor analysis is a statistical technique employed to evaluate how observed variables correlate through common factors and unique variables. While it is often used to analyze price movement in the unstable stock market, it does not always…
We explain the main concepts of Prospect Theory and Cumulative Prospect Theory within the framework of rational dynamic asset pricing theory. We derive option pricing formulas when asset returns are altered with a generalized Prospect…
Estimation and prediction in high dimensional multivariate factor stochastic volatility models is an important and active research area because such models allow a parsimonious representation of multivariate stochastic volatility. Bayesian…
Derivative pricing is about cash flow discounting at the riskfree rate. This teaching has lost its meaning post the financial crisis, due to the addition of extra value adjustments (XVA), which also made derivatives pricing and valuation a…
We analyze correlations among stock returns via a series of widely adopted parameters which we refer to as explanatory variables. We subsequently exploit the results to propose a long only quantitative adaptive technique to construct a…
We address the problem of long-range memory in the financial markets. There are two conceptually different ways to reproduce power-law decay of auto-correlation function: using fractional Brownian motion as well as non-linear stochastic…
Financial markets are interconnected, with micro-currents propagating across global markets and shaping economic trends. This paper moves beyond traditional stock market indices to examine cross-sectional return distributions-15 in our…
Finding Bertram's optimal trading strategy for a pair of cointegrated assets following the Ornstein--Uhlenbeck price difference process can be formulated as an unconstrained convex optimization problem for maximization of expected profit…
In many sequential decision-making problems one is interested in minimizing an expected cumulative cost while taking into account \emph{risk}, i.e., increased awareness of events of small probability and high consequences. Accordingly, the…
We extend the fundamental theorem of asset pricing to a model where the risky stock is subject to proportional transaction costs in the form of bid-ask spreads and the bank account has different interest rates for borrowing and lending. We…
Drifts of asset returns are notoriously difficult to model accurately and, yet, trading strategies obtained from portfolio optimization are very sensitive to them. To mitigate this well-known phenomenon we study robust growth-optimization…
In the standard equilibrium and/or arbitrage pricing framework, the value of any asset is uniquely specified from the belief that only the systematic risks need to be remunerated by the market. Here, we show that, even for arbitrary large…
We address the problem of computing reliable policies in reinforcement learning problems with limited data. In particular, we compute policies that achieve good returns with high confidence when deployed. This objective, known as the…
We study the optimal asset allocation problem for a fund manager whose compensation depends on the performance of her portfolio with respect to a benchmark. The objective of the manager is to maximise the expected utility of her final…
We introduce a simple and tractable methodology for estimating semiparametric conditional latent factor models. Our approach disentangles the roles of characteristics in capturing factor betas of asset returns from ``alpha.'' We construct…
We explore credit risk pricing by modeling equity as a call option and debt as the difference between the firm's asset value and a put option, following the structural framework of the Merton model. Our approach proceeds in two stages:…
We propose a multi-scale stochastic volatility model in which a fast mean-reverting factor of volatility is built on top of the Heston stochastic volatility model. A singular pertubative expansion is then used to obtain an approximation for…