Related papers: The Dispersion Bias
It is widely recognized that when classical optimal strategies are applied with parameters estimated from data, the resulting portfolio weights are remarkably volatile and unstable over time. The predominant explanation for this is the…
The asymptotic distribution of the Markowitz portfolio is derived, for the general case (assuming fourth moments of returns exist), and for the case of multivariate normal returns. The derivation allows for inference which is robust to…
Obtaining reliable estimates of conditional covariance matrices is an important task of heteroskedastic multivariate time series. In portfolio optimization and financial risk management, it is crucial to provide measures of uncertainty and…
In the framework of risk management, for the study of the sensitivity of pricing and hedging in stochastic financial models to changes of parameters and to perturbations of the stock prices, we propose an error calculus which is an…
We introduce a novel approach to portfolio optimization that leverages hierarchical graph structures and the Schur complement method to systematically reduce computational complexity while preserving full covariance information. Inspired by…
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 the mean-variance optimal portfolio choice of an investor pre-committed to a deterministic investment policy in continuous time in a market with mean-reversion in the risk-free rate and the equity risk-premium. In the…
We first study the properties of solutions of quadratic programs with linear equality constraints whose parameters are estimated from data in the high-dimensional setting where p, the number of variables in the problem, is of the same order…
We propose a method for extending a given asset pricing formula to account for two additional sources of risk: the risk associated with future changes in market--calibrated parameters and the remaining risk associated with idiosyncratic…
We consider the problem of mean-variance portfolio optimization for a generic covariance matrix subject to the budget constraint and the constraint for the expected return, with the application of the replica method borrowed from the…
This paper presents how the most recent improvements made on covariance matrix estimation and model order selection can be applied to the portfolio optimisation problem. The particular case of the Maximum Variety Portfolio is treated but…
The comovement phenomenon in financial markets creates decision scenarios with positively correlated asset returns. This paper addresses covariance matrix estimation under such conditions, motivated by observations of significant positive…
Variational inference has become one of the most widely used methods in latent variable modeling. In its basic form, variational inference employs a fully factorized variational distribution and minimizes its KL divergence to the posterior.…
We revisit Markowitz's mean-variance portfolio selection model by considering a distributionally robust version, where the region of distributional uncertainty is around the empirical measure and the discrepancy between probability measures…
Choosing a portfolio of risky assets over time that maximizes the expected return at the same time as it minimizes portfolio risk is a classical problem in Mathematical Finance and is referred to as the dynamic Markowitz problem (when the…
We consider the hedging error of a derivative due to discrete trading in the presence of a drift in the dynamics of the underlying asset. We suppose that the trader wishes to find rebalancing times for the hedging portfolio which enable him…
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…
In this paper, we revisit the relationship between investors' utility functions and portfolio allocation rules. We derive portfolio allocation rules for asymmetric Laplace distributed $ALD(\mu,\sigma,\kappa)$ returns and compare them with…
We consider the investor who doesn't trade shares of his portfolio. The investor only observes the current trades made in the market with his securities to estimate the current return, variance, and risks of his unchanged portfolio. We show…
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…