Related papers: Leverage and Uncertainty
Kelly's criterion is a betting strategy that maximizes the long term growth rate, but which is known to be risky. Here, we find optimal betting strategies that gives the highest capital growth rate while keeping a certain low value of risky…
While wealth distribution in the world is highly skewed and heavy-tailed, human talent - as the majority of individual features - is normally distributed. In a recent computational study by Pluchino et al [Talent vs luck: The role of…
Multifractal processes are a relatively new tool of stock market analysis. Their power lies in the ability to take multiple orders of autocorrelations into account explicitly. In the first part of the paper we discuss the framework of the…
This paper characterizes the equilibrium in a continuous time financial market populated by heterogeneous agents who differ in their rate of relative risk aversion and face convex portfolio constraints. The model is studied in an…
Common asset holdings are widely believed to have been the primary vector of contagion in the recent financial crisis. We develop a network approach to the amplification of financial contagion due to the combination of overlapping…
Estimation of tail quantities, such as expected shortfall or Value at Risk, is a difficult problem. We show how the theory of nonlinear expectations, in particular the Data-robust expectation introduced in [5], can assist in the…
In this paper, motivated by the celebrated work of Kelly, we consider the problem of portfolio weight selection to maximize expected logarithmic growth. Going beyond existing literature, our focal point here is the rebalancing frequency…
This article investigates the influence of luck and strategic considerations on performance of teams participating in the M6 investment challenge. We find that there is insufficient evidence to suggest that the extreme Sharpe ratios…
Classical mean-variance portfolio theory tells us how to construct a portfolio of assets which has the greatest expected return for a given level of return volatility. Utility theory then allows an investor to choose the point along this…
A risk analyst assesses potential financial losses based on multiple sources of information. Often, the assessment does not only depend on the specification of the loss random variable but also various economic scenarios. Motivated by this…
It is well known that the distribution of returns from various financial instruments are leptokurtic, meaning that the distributions have "fatter tails" than a Normal distribution, and have skew toward zero. This paper presents a graceful…
Based on a criterium of mathematical simplicity and consistency with empirical market data, a stochastic volatility model has been obtained with the volatility process driven by fractional noise. Depending on whether the stochasticity…
Risk measures, which typically evaluate the impact of extreme losses, are highly sensitive to misspecification in the tails. This paper studies a robust optimization approach to combat tail uncertainty by proposing a unifying framework to…
Measuring systemic risk or fragility of financial systems is a ubiquitous task of fundamental importance in analyzing market efficiency, portfolio allocation, and containment of financial contagions. Recent attempts have shown that…
The problem of allocating scarce items to individuals is an important practical question in market design. An increasingly popular set of mechanisms for this task uses the concept of market equilibrium: individuals report their preferences,…
As large language models (LLMs) continue to evolve, understanding and quantifying the uncertainty in their predictions is critical for enhancing application credibility. However, the existing literature relevant to LLM uncertainty…
The appreciation and utilisation of risk and uncertainty can play a key role in helping to solve some of the many ethical issues that are posed by AI. Understanding the uncertainties can allow algorithms to make better decisions by…
We introduce a neural network approach for assessing the risk of a portfolio of assets and liabilities over a given time period. This requires a conditional valuation of the portfolio given the state of the world at a later time, a problem…
In classic Kelly gambling, bets are chosen to maximize the expected log growth of wealth, under a known probability distribution. Breiman provides rigorous mathematical proofs that Kelly strategy maximizes the rate of asset growth…
We present a simple agent-based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a Value-at-Risk constraint, based on historical observations of asset prices. The…