Related papers: Lost in Diversification
When the available statistical information is imperfect, it is dangerous to follow standard optimisation procedures to construct an optimal portfolio, which usually leads to a strong concentration of the weights on very few assets. We…
Network theory proved recently to be useful in the quantification of many properties of financial systems. The analysis of the structure of investment portfolios is a major application since their eventual correlation and overlap impact the…
We develop a theoretical framework for understanding how cognitive load affects information processing in financial markets and test it using exogenous variation in disclosure complexity. Our model distinguishes between attention allocation…
In the information-based approach to asset pricing the market filtration is modelled explicitly as a superposition of signals concerning relevant market factors and independent noise. The rate at which the signal is revealed to the market…
Institutional crossing platforms face a hidden-information problem: investors value trades as portfolios, but liquidity discovery is typically organized around individual securities. We model portfolio crossing as limited-communication…
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…
In financial markets valuable information is rarely circulated homogeneously, because of time required for information to spread. However, advances in communication technology means that the 'lifetime' of important information is typically…
In the market place, diversification reduces risk and provides protection against extreme events by ensuring that one is not overly exposed to individual occurrences. We argue that diversification is best measured by characteristics of the…
Efforts to apply economic complexity to identify diversification opportunities often rely on diagrams comparing the relatedness and complexity or products, technologies, or industries. Yer, the use of these diagrams is not based on…
The mutual information between a set of stimuli and the elicited neural responses is compared to the corresponding decoded information. The decoding procedure is presented as an artificial distortion of the joint probabilities between…
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…
We address a fundamental problem that is systematically encountered when modeling complex systems: the limitedness of the information available. In the case of economic and financial networks, privacy issues severely limit the information…
Financial markets, with their vast range of different investment opportunities, can be seen as a system of many different simultaneous games with diverse and often unknown levels of risk and reward. We introduce generalizations to the…
The apparent dichotomy between information-processing and dynamical approaches to complexity science forces researchers to choose between two diverging sets of tools and explanations, creating conflict and often hindering scientific…
The aim of this research is to give a simple framework to evaluate/quantize the "transparency" of a firm. We assume that the process of the firm value is only observable once in a while but is strongly correlated with the stock price which…
We study the pricing of credit derivatives with asymmetric information. The managers have complete information on the value process of the firm and on the default threshold, while the investors on the market have only partial observations,…
This paper delves into financial markets that incorporate a novel form of heterogeneity among investors, specifically in terms of their beliefs regarding the reliability of signals in the business cycle economy model, which may be biased.…
Portfolio diversification is a cornerstone of modern finance, while risk aversion is central to decision theory; both concepts are long-standing and foundational. We investigate their connections by studying how different forms of…
We show that while anonymization effectively obscures firm identity, it significantly reduces the power of textual understanding, thereby diminishing models' ability to extract meaningful economic signals from financial texts. This…
Diversification is usually viewed as a reliable way to reduce risk, yet it can dramatically fail for heavy-tailed losses with infinite mean: pooling independent losses of this type may increase tail risk at every threshold. We study this…