English

Optimization of relative arbitrage

Portfolio Management 2014-11-26 v3 Optimization and Control Statistics Theory Statistics Theory

Abstract

In stochastic portfolio theory, a relative arbitrage is an equity portfolio which is guaranteed to outperform a benchmark portfolio over a finite horizon. When the market is diverse and sufficiently volatile, and the benchmark is the market or a buy-and-hold portfolio, functionally generated portfolios introduced by Fernholz provide a systematic way of constructing relative arbitrages. In this paper we show that if the market portfolio is replaced by the equal or entropy weighted portfolio among many others, no relative arbitrages can be constructed under the same conditions using functionally generated portfolios. We also introduce and study a shaped-constrained optimization problem for functionally generated portfolios in the spirit of maximum likelihood estimation of a log-concave density.

Keywords

Cite

@article{arxiv.1407.8300,
  title  = {Optimization of relative arbitrage},
  author = {Ting-Kam Leonard Wong},
  journal= {arXiv preprint arXiv:1407.8300},
  year   = {2014}
}

Comments

33 pages, 5 figures, 2 tables; revised version

R2 v1 2026-06-22T05:17:20.175Z