Related papers: Portfolio Optimization and the Random Magnet Probl…
Asynchronous trading in high-frequency financial markets introduces significant biases into econometric analysis, distorting risk estimates and leading to suboptimal portfolio decisions. Existing synchronization methods, such as the…
This paper presents a novel framework for analyzing the optimal asset and signal combination problem. Our approach builds upon the dynamic portfolio selection problem introduced by Brandt and Santa-Clara (2006) and consists of two stages.…
Firms having similar business activities are correlated. We analyze two different cross-correlation matrices C constructed from (i) 30-min price fluctuations of 1000 US stocks for the 2-year period 1994-95 and (ii) 1-day price fluctuations…
Using Random Matrix Theory, we propose a universal and versatile tool to reveal the existence of "fleeting modes", i.e. portfolios that carry statistically significant excess risk, signalling ex-post a change in the correlation structure in…
Managing a portfolio to a risk model can tilt the portfolio toward weaknesses of the model. As a result, the optimized portfolio acquires downside exposure to uncertainty in the model itself, what we call "second order risk." We propose a…
Providing optimal portfolio selection for investors has always been one of the hot topics in academia. In view of the traditional portfolio model could not adapt to the actual capital market and can provide erroneous results. This paper…
We aim to cluster financial assets in order to identify a small set of stocks to approximate the level of diversification of the whole universe of stocks. We develop a data-driven approach to clustering based on a correlation blockmodel in…
In this research, starting from a widely accepted definition of risk, we support the idea that risk reduction is a more realistic objective than risk minimization, which represents a theoretical utopia. Furthermore, significant risk…
The potential benefits of portfolio diversification have been known to investors for a long time. Markowitz (1952) suggested the seminal approach for optimizing the portfolio problem based on finding the weights as budget shares that…
This paper examines the possibility of using derivative-implied risk premia to explain stock returns. The rapid development of derivative markets has led to the possibility of trading various kinds of risks, such as credit and interest rate…
We empirically test predictability on asset price by using stock selection rules based on maximum drawdown and its consecutive recovery. In various equity markets, monthly momentum- and weekly contrarian-style portfolios constructed from…
In many stochastic problems, the output of interest depends on an input random vector mainly through a single random variable (or index) via an appropriate univariate transformation of the input. We exploit this feature by proposing an…
The investment risk minimization problem with budget and return constraints has been the subject of research using replica analysis but there are shortcomings in the extant literature. With respect to Tobin's separation theorem and the…
Estimation of the covariance matrix of asset returns is crucial to portfolio construction. As suggested by economic theories, the correlation structure among assets differs between emerging markets and developed countries. It is therefore…
In portfolio risk minimization, the inverse covariance matrix of returns is often unknown and has to be estimated in practice. This inverse covariance matrix also prescribes the hedge trades in which a stock is hedged by all the other…
Stock correlations is crucial to asset pricing, investor decision-making, and financial risk regulations. However, microscopic explanation based on agent-based modeling is still lacking. We here propose a model derived from minority game…
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…
We study a an optimal high frequency trading problem within a market microstructure model designed to be a good compromise between accuracy and tractability. The stock price is driven by a Markov Renewal Process (MRP), while market orders…
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…
We investigate an application of network centrality measures to portfolio optimization, by generalizing the method in [Pozzi, Di Matteo and Aste, \emph{Spread of risks across financial markets: better to invest in the peripheries},…