Related papers: How many independent bets are there?
Against the widely held belief that diversification at banking institutions contributes to the stability of the financial system, Wagner (2010) found that diversification actually makes systemic crisis more likely. While it is true, as…
In this paper we study different concepts of independence for convex sets of probabilities. There will be two basic ideas for independence. The first is irrelevance. Two variables are independent when a change on the knowledge about one…
Diverse planning is the problem of finding multiple plans for a given problem specification, which is at the core of many real-world applications. For example, diverse planning is a critical piece for the efficiency of plan recognition…
In many professons employees are rewarded according to their relative performance. Corresponding economy can be modeled by taking $N$ independent agents who gain from the market with a rate which depends on their current gain. We argue that…
The discrepancy between realized volatility and the market's view of volatility has been known to predict individual equity options at the monthly horizon. It is not clear how this predictability depends on a forecast's ability to predict…
A widely applied diversification paradigm is the naive diversification choice heuristic. It stipulates that an economic agent allocates equal decision weights to given choice alternatives independent of their individual characteristics.…
In this paper, we propose a general bi-objective model for portfolio selection, aiming to maximize both a diversification measure and the portfolio expected return. Within this general framework, we focus on maximizing a diversification…
A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the…
For a game with positive profit, the optimal proportion of investment required to continue investing without borrowing is uniquely determined by an integral equation for each price. For a game with parallel translated profit, the ratio of…
Financial markets are well known examples of multi-fractal complex systems that have garnered much interest in their characterization through complex network theory. The recent studies have used correlation based distance metrics for…
In this article, I will present a paradox whose purpose is to draw your attention to an important topic in finance, concerning the non-independence of the financial returns (non-ergodic hypothesis). In this paradox, we have two people…
We give elementary examples within a framework for studying decisions under uncertainty where probabilities are only roughly known. The framework, in gambling terms, is that the size of a bet is proportional to the gambler's perceived…
Can one demonstrate quantitative effects of diversity within a system comprised of distinct individuals on the performance of the system as a whole? Assuming that individuals can be different, we develop a model to interpolate between…
The downside risk of a portfolio of (equity)assets is generally substantially higher than the downside risk of its components. In particular in times of crises when assets tend to have high correlation, the understanding of this difference…
Machine learning (ML) is increasingly used in high-stakes settings, yet multiplicity - the existence of multiple good models - means that some predictions are essentially arbitrary. ML researchers and philosophers posit that multiplicity…
Investment returns naturally reside on irregular domains, however, standard multivariate portfolio optimization methods are agnostic to data structure. To this end, we investigate ways for domain knowledge to be conveniently incorporated…
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…
Volatility is the canonical measure of financial risk, a role largely inherited from Modern Portfolio Theory. Yet, its universality rests on restrictive efficiency assumptions that render volatility, at best, an incomplete proxy for true…
Institutions and investors are constantly faced with the challenge of appropriately distributing endowments. No budget is limitless and optimising overall spending without sacrificing positive outcomes has been approached and resolved using…
When assessing group solvency, an important question is to what extent intragroup transfers may be considered, as this determines to which extent diversification can be achieved. We suggest a framework to describe the families of admissible…