Related papers: Markowitz Variance May Vastly Undervalue or Overes…
The focal point of this paper is the issue of "drawdown" which arises in recursive betting scenarios and related applications in the stock market. Roughly speaking, drawdown is understood to mean drops in wealth over time from peaks to…
Designing dynamic portfolio insurance strategies under market conditions switching between two or more regimes is a challenging task in financial economics. Recently, a promising approach employing the value-at-risk (VaR) measure to assign…
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…
This paper studies a portfolio optimization problem in a discrete-time Markovian model of a financial market, in which asset price dynamics depend on an external process of economic factors. There are transaction costs with a structure that…
Recent studies inspired by results from random matrix theory [1,2,3] found that covariance matrices determined from empirical financial time series appear to contain such a high amount of noise that their structure can essentially be…
This paper studies the time-varying structure of the equity market with respect to market capitalization. First, we analyze the distribution of the 100 largest companies' market capitalizations over time, in terms of inequality,…
We propose a pairs trading model that incorporates a time-varying volatility of the Constant Elasticity of Variance type. Our approach is based on stochastic control techniques; given a fixed time horizon and a portfolio of two…
We consider an investor, whose portfolio consists of a single risky asset and a risk free asset, who wants to maximize his expected utility of the portfolio subject to managing the Value at Risk (VaR) assuming a heavy tailed distribution of…
We investigate whether sophisticated volatility estimation improves the out-of-sample performance of mean-variance portfolio strategies relative to the naive 1/N strategy. The portfolio strategies rely solely upon second moments. Using a…
According to recent findings [1,2], empirical covariance matrices deduced from financial return series contain such a high amount of noise that, apart from a few large eigenvalues and the corresponding eigenvectors, their structure can…
The optimization of large portfolios displays an inherent instability to estimation error. This poses a fundamental problem, because solutions that are not stable under sample fluctuations may look optimal for a given sample, but are, in…
The time dependence of the recently introduced minimum spanning tree description of correlations between stocks, called the ``asset tree'' have been studied to reflect the economic taxonomy. The nodes of the tree are identified with stocks…
In this work, we consider weighted signed network representations of financial markets derived from raw or denoised correlation matrices, and examine how negative edges can be exploited to reduce portfolio risk. We then propose a discrete…
The use of factor stochastic volatility models requires choosing the number of latent factors used to describe the dynamics of the financial returns process; however, empirical evidence suggests that the number and makeup of pertinent…
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…
This paper considers two investors who perform mean-variance portfolio selection with asymmetric information: one knows the true stock dynamics, while the other has to infer the true dynamics from observed stock evolution. Their portfolio…
We investigate how and when to diversify capital over assets, i.e., the portfolio selection problem, from a signal processing perspective. To this end, we first construct portfolios that achieve the optimal expected growth in i.i.d.…
In this paper, we consider a continuous-time mean-variance portfolio selection with regime-switching and random horizon. Unlike previous works, the dynamic of assets are described by non-Markovian regime-switching models in the sense that…
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…
In this work, we study a dynamic portfolio optimization problem related to pairs trading, which is an investment strategy that matches a long position in one security with a short position in another security with similar characteristics.…