Related papers: Lost in Diversification
We address the problem of partial index tracking, replicating a benchmark index using a small number of assets. Accurate tracking with a sparse portfolio is extensively studied as a classic finance problem. However in practice, a tracking…
Market Microstructure is the investigation of the process and protocols that govern the exchange of assets with the objective of reducing frictions that can impede the transfer. In financial markets, where there is an abundance of recorded…
Strategic agents in incomplete-information environments have a conflicted relationship with uncertainty: it can keep them unpredictable to their opponents, but it must also be overcome to predict the actions of those opponents. We use a…
We investigate an optimal investment problem with a general performance criterion which, in particular, includes discontinuous functions. Prices are modeled as diffusions and the market is incomplete. We find an explicit solution for the…
Common asset holding by financial institutions, namely portfolio overlap, is nowadays regarded as an important channel for financial contagion with the potential to trigger fire sales and thus severe losses at the systemic level. In this…
The investor is interested in the expected return and he is also concerned about the risk and the uncertainty assumed by the investment. One of the most popular concepts used to measure the risk and the uncertainty is the variance and/or…
It is shown that the axioms for coherent risk measures imply that whenever there is an asset in a portfolio that dominates the others in a given sample (which happens with finite probability even for large samples), then this portfolio…
The classical mean-variance framework characterizes portfolio risk solely through return variance and the covariance matrix, implicitly assuming that all relevant sources of risk are captured by second moments. In modern financial markets,…
Following the idea of Bayesian learning via Gaussian mixture model, we organically combine the backward-looking information contained in the historical data and the forward-looking information implied by the market portfolio, which is…
This paper investigates optimal portfolio strategies in a market where the drift is driven by an unobserved Markov chain. Information on the state of this chain is obtained from stock prices and expert opinions in the form of signals at…
Quantitative Investment, built on the solid foundation of robust financial theories, is at the center stage in investment industry today. The essence of quantitative investment is the multi-factor model, which explains the relationship…
To cope with the complexity of large networks, a number of dimensionality reduction techniques for graphs have been developed. However, the extent to which information is lost or preserved when these techniques are employed has not yet been…
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…
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 diverges from previous literature by considering the utility maximization problem in the context of investors having the freedom to actively acquire additional information to mitigate estimation risk. We derive closed-form value…
An asymmetric information model is introduced for the situation in which there is a small agent who is more susceptible to the flow of information in the market than the general market participant, and who tries to implement strategies…
The stability of the financial system is associated with systemic risk factors such as the concurrent default of numerous small obligors. Hence it is of utmost importance to study the mutual dependence of losses for different creditors in…
The conventional wisdom of mean-variance (MV) portfolio theory asserts that the nature of the relationship between risk and diversification is a decreasing asymptotic function, with the asymptote approximating the level of portfolio…
Analysis of longitudinal randomised controlled trials is frequently complicated because patients deviate from the protocol. Where such deviations are relevant for the estimand, we are typically required to make an untestable assumption…
We study the ex-ante minimization of market inefficiency, defined in terms of minimum deviation of market prices from fundamental values, from a centralized planner's perspective. Prices are pressured from exogenous trading actions of…