On The Choice Of Covariance Specifications For Portfolio Selection Problems
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| Author | : Alexandre Ferreira |
| Publisher | : |
| Total Pages | : 25 |
| Release | : 2017 |
| Genre | : |
| ISBN | : |
Two crucial aspects to the problem of portfolio selection are the specification of the model for expected returns and their covariances, as well as the choice of the investment policy to be adopted. A common trade-off is to consider dynamic covariance specifications vis-a-vis static models such as those based on shrinkage methods. This work empirically shows that these two aspects are intrinsically attached to the impact of transaction costs. To address this question, we implement a broad range of covariance specifications to generate a set of 16 portfolio selection policies over a period of 25 years in a high dimensional sample composed of 69 stocks belonging to the S&P100 index. We find that, in the absence of transaction costs, GARCH-type dynamic covariances deliver portfolios with similar risk-adjusted performance with respect to those obtained with static covariance specifications. In more realistic scenarios involving alternative levels of transaction costs, portfolios based on static covariance models consistently outperform as they demand a much lower level of portfolio turnover. In particular, we find that a risk-averse investor with quadratic utility function is willing to pay an annualized fee of 291 basis points (bp) on average in order to switch from the dynamic covariance models to a benchmark static covariance specification when the level of transaction costs is 20 bp. Finally, portfolio policies that seek to alleviate estimation error by ignoring off-diagonal covariance elements such as those proposed in Kirby and Ostdiek (2012) are more robust specially in scenarios with higher transaction costs.
| Author | : G. Bamberg |
| Publisher | : Springer |
| Total Pages | : 324 |
| Release | : 1984-04 |
| Genre | : Business & Economics |
| ISBN | : |
This volume invites young scientists and doctoral students in the fields of capital market theory, informational economics, and mana gement science to visualize the many different ways to arrive at a thorough understanding of risk and capital. Rather than focusing on one subject only, the sample of papers collected may be viewed as a representative choice of various aspects. Some contributions have more the character of surveys on the state of the art while others stress original research. We fou~d it proper to group the papers under two main themes. Part I covers information, risk aversion, and capital market theory. Part II is devoted to management, policy, and empirical evidence. Two contributions, we think, deserved to break this allocation and to be placed in a prologue. The ideas expressed by Jost B. Walther, although meant as opening address, draw interesting parallels for risk and capital in genetics and evolution. An old, fundamental pro blem was asked and solved by Martin J. Beckmann: how does risk affect saving? The wise answer (Martin's 60th birthday is in July 1984) is both smart and simple, although the proof requires sophisticated dynamic programming. As always, such a work must be the result of a special occasion.
| Author | : Norman R. Swanson |
| Publisher | : MDPI |
| Total Pages | : 196 |
| Release | : 2021-08-31 |
| Genre | : Business & Economics |
| ISBN | : 303650852X |
Recently, considerable attention has been placed on the development and application of tools useful for the analysis of the high-dimensional and/or high-frequency datasets that now dominate the landscape. The purpose of this Special Issue is to collect both methodological and empirical papers that develop and utilize state-of-the-art econometric techniques for the analysis of such data.
| Author | : Frank J. Fabozzi |
| Publisher | : John Wiley & Sons |
| Total Pages | : 513 |
| Release | : 2007-04-27 |
| Genre | : Business & Economics |
| ISBN | : 0470164891 |
Praise for Robust Portfolio Optimization and Management "In the half century since Harry Markowitz introduced his elegant theory for selecting portfolios, investors and scholars have extended and refined its application to a wide range of real-world problems, culminating in the contents of this masterful book. Fabozzi, Kolm, Pachamanova, and Focardi deserve high praise for producing a technically rigorous yet remarkably accessible guide to the latest advances in portfolio construction." --Mark Kritzman, President and CEO, Windham Capital Management, LLC "The topic of robust optimization (RO) has become 'hot' over the past several years, especially in real-world financial applications. This interest has been sparked, in part, by practitioners who implemented classical portfolio models for asset allocation without considering estimation and model robustness a part of their overall allocation methodology, and experienced poor performance. Anyone interested in these developments ought to own a copy of this book. The authors cover the recent developments of the RO area in an intuitive, easy-to-read manner, provide numerous examples, and discuss practical considerations. I highly recommend this book to finance professionals and students alike." --John M. Mulvey, Professor of Operations Research and Financial Engineering, Princeton University
| Author | : Andre A. P. Santos |
| Publisher | : |
| Total Pages | : 34 |
| Release | : 2018 |
| Genre | : |
| ISBN | : |
The covariation among financial asset returns is often a key ingredient used in the construction of optimal portfolios. Estimating covariances from data, however, is challenging due to the potential influence of estimation error involved specially in high dimensional problems, which can impact negatively the performance of the resulting portfolios. We address this question by putting forward a simple approach to disentangle the role of variance and covariance information in the case of mean-variance efficient portfolios. Specifically, mean-variance portfolios can be represented as a two-fund rule: one fund is a fully invested portfolio that depends on diagonal covariance elements whereas the other is a long-short, self financed portfolio depending on off-diagonal elements. We characterize the contribution of each of these two components to the overall performance in terms of out-of-sample returns, risk, risk-adjusted returns, and turnover. Finally, we provide an empirical illustration of the proposed portfolio decomposition using both simulated and real market data.
| Author | : Leonard C Maclean |
| Publisher | : World Scientific |
| Total Pages | : 941 |
| Release | : 2013-05-10 |
| Genre | : Business & Economics |
| ISBN | : 981441736X |
This handbook in two parts covers key topics of the theory of financial decision making. Some of the papers discuss real applications or case studies as well. There are a number of new papers that have never been published before especially in Part II.Part I is concerned with Decision Making Under Uncertainty. This includes subsections on Arbitrage, Utility Theory, Risk Aversion and Static Portfolio Theory, and Stochastic Dominance. Part II is concerned with Dynamic Modeling that is the transition for static decision making to multiperiod decision making. The analysis starts with Risk Measures and then discusses Dynamic Portfolio Theory, Tactical Asset Allocation and Asset-Liability Management Using Utility and Goal Based Consumption-Investment Decision Models.A comprehensive set of problems both computational and review and mind expanding with many unsolved problems are in an accompanying problems book. The handbook plus the book of problems form a very strong set of materials for PhD and Masters courses both as the main or as supplementary text in finance theory, financial decision making and portfolio theory. For researchers, it is a valuable resource being an up to date treatment of topics in the classic books on these topics by Johnathan Ingersoll in 1988, and William Ziemba and Raymond Vickson in 1975 (updated 2nd edition published in 2006).
| Author | : Leonard C Maclean |
| Publisher | : World Scientific |
| Total Pages | : 883 |
| Release | : 2011-02-10 |
| Genre | : Business & Economics |
| ISBN | : 981446581X |
This volume provides the definitive treatment of fortune's formula or the Kelly capital growth criterion as it is often called. The strategy is to maximize long run wealth of the investor by maximizing the period by period expected utility of wealth with a logarithmic utility function. Mathematical theorems show that only the log utility function maximizes asymptotic long run wealth and minimizes the expected time to arbitrary large goals. In general, the strategy is risky in the short term but as the number of bets increase, the Kelly bettor's wealth tends to be much larger than those with essentially different strategies. So most of the time, the Kelly bettor will have much more wealth than these other bettors but the Kelly strategy can lead to considerable losses a small percent of the time. There are ways to reduce this risk at the cost of lower expected final wealth using fractional Kelly strategies that blend the Kelly suggested wager with cash. The various classic reprinted papers and the new ones written specifically for this volume cover various aspects of the theory and practice of dynamic investing. Good and bad properties are discussed, as are fixed-mix and volatility induced growth strategies. The relationships with utility theory and the use of these ideas by great investors are featured.Contents: "The Early Ideas and Contributions: "Introduction to the Early Ideas and ContributionsExposition of a New Theory on the Measurement of Risk (translated by Louise Sommer) "(D Bernoulli)"A New Interpretation of Information Rate "(J R Kelly, Jr)"Criteria for Choice among Risky Ventures "(H A Latan‚)"Optimal Gambling Systems for Favorable Games "(L Breiman)"Optimal Gambling Systems for Favorable Games "(E O Thorp)"Portfolio Choice and the Kelly Criterion "(E O Thorp)"Optimal Investment and Consumption Strategies under Risk for a Class of Utility Functions "(N H Hakansson)"On Optimal Myopic Portfolio Policies, with and without Serial Correlation of Yields "(N H Hakansson)"Evidence on the ?Growth-Optimum-Model? "(R Roll)""Classic Papers and Theories: "Introduction to the Classic Papers and TheoriesCompetitive Optimality of Logarithmic Investment "(R M Bell and T M Cover)"A Bound on the Financial Value of Information "(A R Barron and T M Cover)"Asymptotic Optimality and Asymptotic Equipartition Properties of Log-Optimum Investment "(P H Algoet and T M Cover)"Universal Portfolios "(T M Cover)"The Cost of Achieving the Best Portfolio in Hindsight "(E Ordentlich and T M Cover)"Optimal Strategies for Repeated Games "(M Finkelstein and R Whitley)"The Effect of Errors in Means, Variances and Co-Variances on Optimal Portfolio Choice "(V K Chopra and W T Ziemba)"Time to Wealth Goals in Capital Accumulation "(L C MacLean, W T Ziemba, and Y Li)"Survival and Evolutionary Stability of Rule the Kelly "(I V Evstigneev, T Hens, and K R Schenk-Hopp‚)"Application of the Kelly Criterion to Ornstein-Uhlenbeck Processes "(Y Lv and B K Meister)""The Relationship of Kelly Optimization to Asset Allocation: "Introduction to the Relationship of Kelly Optimization to Asset AllocationSurvival and Growth with a Liability: Optimal Portfolio Strategies in Continuous Time "(S Browne)"Growth versus Security in Dynamic Investment Analysis "(L C MacLean, W T Ziemba, and G Blazenko)"Capital Growth with Security "(L C MacLean, R Sanegre, Y Zhao, and W T Ziemba)"
| Author | : Nicolas Chapados |
| Publisher | : Springer Science & Business Media |
| Total Pages | : 107 |
| Release | : 2011-07-12 |
| Genre | : Computers |
| ISBN | : 1461405777 |
This brief offers a broad, yet concise, coverage of portfolio choice, containing both application-oriented and academic results, along with abundant pointers to the literature for further study. It cuts through many strands of the subject, presenting not only the classical results from financial economics but also approaches originating from information theory, machine learning and operations research. This compact treatment of the topic will be valuable to students entering the field, as well as practitioners looking for a broad coverage of the topic.
| Author | : Apostolos Kourtis |
| Publisher | : |
| Total Pages | : 35 |
| Release | : 2012 |
| Genre | : |
| ISBN | : |
The estimation of the inverse covariance matrix plays a crucial role in optimal portfolio choice. We propose a new estimation framework that focuses on enhancing portfolio performance. The framework applies the statistical methodology of shrinkage directly to the inverse covariance matrix using two non-parametric methods. The first minimises the out-of-sample portfolio variance while the second aims to increase out-of-sample risk-adjusted returns. We apply the resulting estimators to compute the minimum variance portfolio weights and obtain a set of new portfolio strategies. These strategies have an intuitive form which allows us to extend our framework to account for short-sale constraints, high transaction costs and singular covariance matrices. A comparative empirical analysis against several strategies from the literature shows that the new strategies generally offer higher risk-adjusted returns and lower levels of risk.
| Author | : William T. Ziemba |
| Publisher | : Cambridge University Press |
| Total Pages | : 688 |
| Release | : 1998-11-12 |
| Genre | : Business & Economics |
| ISBN | : 9780521571876 |
The underlying theme of this volume is how to invest assets over time to achieve satisfactory returns subject to uncertainties, various constraints and liability commitments. Most investors, be they individuals or institutions, do not diversify properly across markets nor across time. The papers utilize several approaches and integrate a number of techniques as well as discussing a variety of models that have either been implemented, are close to being implemented, or represent new innovative approaches that may lead to future novel applications. Other issues address the future of asset-liability management modeling. This includes models for individuals, and various financial institutions such as banks and insurance companies. This will lead to custom products, that is, financial engineering. All in all, this will be essential reading for all involved in analysing the financial markets.
