Pub Date : 2021-03-30DOI: 10.1142/S0219024921500138
T. Shibata, M. Nishihara
We develop a contingent claim model to examine the interaction between financing and investment where equity holders decide when to default and debt holders decide when to liquidate as well as maximize the liquidation value. We show that if the debt holders maximize the residual value at liquidation, an increase in liquidation value increases the amount of debt issuance and investment quantity ex ante, delaying corporate investment. This relationship is based on the fact that an increase in the liquidation value decreases the credit spread of debt holders. These results fit well with those of existing empirical studies.
{"title":"FINANCING AND INVESTMENT STRATEGIES UNDER CREDITOR-MAXIMIZED LIQUIDATION","authors":"T. Shibata, M. Nishihara","doi":"10.1142/S0219024921500138","DOIUrl":"https://doi.org/10.1142/S0219024921500138","url":null,"abstract":"We develop a contingent claim model to examine the interaction between financing and investment where equity holders decide when to default and debt holders decide when to liquidate as well as maximize the liquidation value. We show that if the debt holders maximize the residual value at liquidation, an increase in liquidation value increases the amount of debt issuance and investment quantity ex ante, delaying corporate investment. This relationship is based on the fact that an increase in the liquidation value decreases the credit spread of debt holders. These results fit well with those of existing empirical studies.","PeriodicalId":47022,"journal":{"name":"International Journal of Theoretical and Applied Finance","volume":" ","pages":""},"PeriodicalIF":0.5,"publicationDate":"2021-03-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45403869","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-03-02DOI: 10.1142/s0219024921500321
Sandrine Gumbel, Thorsten Schmidt
In this paper, we consider a market with a term structure of credit risky bonds in the single-name case. We aim at minimal assumptions extending existing results in this direction: first, the random field of forward rates is driven by a general semimartingale. Second, the Heath–Jarrow–Morton (HJM) approach is extended with an additional component capturing those future jumps in the term structure which are visible from the current time. Third, the associated recovery scheme is as general as possible, it is only assumed to be nonincreasing. In this general setting, we derive generalized drift conditions which characterize when a given measure is a local martingale measure, thus yielding no asymptotic free lunch with vanishing risk (NAFLVR), the right notion for this large financial market to be free of arbitrage.
{"title":"DEFAULTABLE TERM STRUCTURES DRIVEN BY SEMIMARTINGALES","authors":"Sandrine Gumbel, Thorsten Schmidt","doi":"10.1142/s0219024921500321","DOIUrl":"https://doi.org/10.1142/s0219024921500321","url":null,"abstract":"In this paper, we consider a market with a term structure of credit risky bonds in the single-name case. We aim at minimal assumptions extending existing results in this direction: first, the random field of forward rates is driven by a general semimartingale. Second, the Heath–Jarrow–Morton (HJM) approach is extended with an additional component capturing those future jumps in the term structure which are visible from the current time. Third, the associated recovery scheme is as general as possible, it is only assumed to be nonincreasing. In this general setting, we derive generalized drift conditions which characterize when a given measure is a local martingale measure, thus yielding no asymptotic free lunch with vanishing risk (NAFLVR), the right notion for this large financial market to be free of arbitrage.","PeriodicalId":47022,"journal":{"name":"International Journal of Theoretical and Applied Finance","volume":" ","pages":""},"PeriodicalIF":0.5,"publicationDate":"2021-03-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44040844","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-02-24DOI: 10.1142/S0219024921500059
Rafael Serrano
We propose a model that integrates investment, underwriting, and consumption/dividend policy decisions for a nonlife insurer by using a risk control variable related to the wealth-income ratio of t...
{"title":"PORTFOLIO ALLOCATION IN A LEVY-TYPE JUMP-DIFFUSION MODEL WITH NONLIFE INSURANCE RISK","authors":"Rafael Serrano","doi":"10.1142/S0219024921500059","DOIUrl":"https://doi.org/10.1142/S0219024921500059","url":null,"abstract":"We propose a model that integrates investment, underwriting, and consumption/dividend policy decisions for a nonlife insurer by using a risk control variable related to the wealth-income ratio of t...","PeriodicalId":47022,"journal":{"name":"International Journal of Theoretical and Applied Finance","volume":"1 1","pages":"2150005"},"PeriodicalIF":0.5,"publicationDate":"2021-02-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48560348","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-02-09DOI: 10.1142/S0219024921500072
P. Forsyth
Optimal stochastic control methods are used to examine decumulation strategies for a defined contribution (DC) plan retiree. An initial investment horizon of 15 years is considered, since the retiree will attain this age with high probability. The objective function reward measure is the expected sum of the withdrawals. The objective function tail risk measure is the expected linear shortfall with respect to a desired lower bound for wealth at 15 years. The lower bound wealth level is the amount which is required to fund a lifelong annuity 15 years after retirement, which generates the required minimum cash flows. This ameliorates longevity risk. The controls are the withdrawal amount each year, and the asset allocation strategy. Maximum and minimum withdrawal amounts are specified. Specifying a short initial decumulation horizon, results in the optimal strategy achieving: (i) median withdrawals at the maximum rate within 2–3 years of retirement (ii) terminal wealth larger than the desired lower bound at 15 years, with greater than [Formula: see text] probability and (iii) median terminal wealth at 15 years considerably larger than the desired lower bound. The controls are computed using a parametric model of historical stock and bond returns, and then tested in bootstrap resampled simulations using historical data. At the 15 year investment horizon, the retiree has the option of (i) continuing to self-manage the decumulation policy or (ii) purchasing an annuity.
{"title":"TWO STAGE DECUMULATION STRATEGIES FOR DC PLAN INVESTORS","authors":"P. Forsyth","doi":"10.1142/S0219024921500072","DOIUrl":"https://doi.org/10.1142/S0219024921500072","url":null,"abstract":"Optimal stochastic control methods are used to examine decumulation strategies for a defined contribution (DC) plan retiree. An initial investment horizon of 15 years is considered, since the retiree will attain this age with high probability. The objective function reward measure is the expected sum of the withdrawals. The objective function tail risk measure is the expected linear shortfall with respect to a desired lower bound for wealth at 15 years. The lower bound wealth level is the amount which is required to fund a lifelong annuity 15 years after retirement, which generates the required minimum cash flows. This ameliorates longevity risk. The controls are the withdrawal amount each year, and the asset allocation strategy. Maximum and minimum withdrawal amounts are specified. Specifying a short initial decumulation horizon, results in the optimal strategy achieving: (i) median withdrawals at the maximum rate within 2–3 years of retirement (ii) terminal wealth larger than the desired lower bound at 15 years, with greater than [Formula: see text] probability and (iii) median terminal wealth at 15 years considerably larger than the desired lower bound. The controls are computed using a parametric model of historical stock and bond returns, and then tested in bootstrap resampled simulations using historical data. At the 15 year investment horizon, the retiree has the option of (i) continuing to self-manage the decumulation policy or (ii) purchasing an annuity.","PeriodicalId":47022,"journal":{"name":"International Journal of Theoretical and Applied Finance","volume":" ","pages":""},"PeriodicalIF":0.5,"publicationDate":"2021-02-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45591193","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-12-11DOI: 10.1142/s0219024920500545
Jingsi Xu
In this paper, the objective is to study the continuous mean–variance portfolio selection with a no-short-selling constraint and obtain a time-consistent solution. We assume that there is a self-financing portfolio with wealth process [Formula: see text], in which [Formula: see text] represents the fraction of wealth invested in the risk asset under the short selling prohibition. We investigate the mean–variance optimal constrained problem defined by obtaining the supremum over all admissible controls of the difference between the expectation of the value process at some designated terminal time [Formula: see text] and a positive constant times the variance of [Formula: see text]. To envisage the quadratic nonlinearity introduced by the variance, the method of Lagrangian multipliers reduces the nonlinear problem into a set of linear problems which can be solved by applying the Hamilton–Jacobi–Bellman equation and change of variables formula with local time on curves. Solving the HJB system provides the time-inconsistent solution and from there, we derive the time-consistent optimal control.
{"title":"OPTIMAL MEAN–VARIANCE PORTFOLIO SELECTION WITH NO-SHORT-SELLING CONSTRAINT","authors":"Jingsi Xu","doi":"10.1142/s0219024920500545","DOIUrl":"https://doi.org/10.1142/s0219024920500545","url":null,"abstract":"In this paper, the objective is to study the continuous mean–variance portfolio selection with a no-short-selling constraint and obtain a time-consistent solution. We assume that there is a self-financing portfolio with wealth process [Formula: see text], in which [Formula: see text] represents the fraction of wealth invested in the risk asset under the short selling prohibition. We investigate the mean–variance optimal constrained problem defined by obtaining the supremum over all admissible controls of the difference between the expectation of the value process at some designated terminal time [Formula: see text] and a positive constant times the variance of [Formula: see text]. To envisage the quadratic nonlinearity introduced by the variance, the method of Lagrangian multipliers reduces the nonlinear problem into a set of linear problems which can be solved by applying the Hamilton–Jacobi–Bellman equation and change of variables formula with local time on curves. Solving the HJB system provides the time-inconsistent solution and from there, we derive the time-consistent optimal control.","PeriodicalId":47022,"journal":{"name":"International Journal of Theoretical and Applied Finance","volume":"1 1","pages":"2050054"},"PeriodicalIF":0.5,"publicationDate":"2020-12-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44988549","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-12-10DOI: 10.1142/s0219024920500533
Nils Detering, T. Meyer-Brandis, K. Panagiotou, D. Ritter
One of the most characteristic features of the global financial network is its inherently complex and intertwined structure. From the perspective of systemic risk it is important to understand the influence of this network structure on default contagion. Using sparse random graphs to model the financial network, asymptotic methods turned out to be powerful for the purpose of analytically describing the contagion process and making statements about resilience. So far, however, such methods have been limited to so-called rank-one models in which, informally speaking, the only parameter for the skeleton of the network is the degree sequence and the contagion process can be described by a one-dimensional fixed-point equation. Such networks fail to account for the possibility of a pronounced block structure such as core/periphery or a network composed of different connected blocks for different countries. We present a much more general model here, where we distinguish vertices (institutions) of different types and let edge probabilities and exposures depend on the types of both, the receiving and the sending vertex, plus additional parameters. Our main result allows one to compute explicitly the systemic damage caused by some initial local shock event, and we derive a complete characterization of resilient and nonresilient financial systems. This is the first instance that default contagion is rigorously studied in a model outside the class of rank-one models and several technical challenges arise. In contrast to previous work, in which networks could be classified as resilient or nonresilient independently of the distribution of the shock, information about the shock becomes important in our model and a more refined resilience condition arises. Among other applications of our theory we derive resilience conditions for the global network based on subnetwork conditions only.
{"title":"FINANCIAL CONTAGION IN A STOCHASTIC BLOCK MODEL","authors":"Nils Detering, T. Meyer-Brandis, K. Panagiotou, D. Ritter","doi":"10.1142/s0219024920500533","DOIUrl":"https://doi.org/10.1142/s0219024920500533","url":null,"abstract":"One of the most characteristic features of the global financial network is its inherently complex and intertwined structure. From the perspective of systemic risk it is important to understand the influence of this network structure on default contagion. Using sparse random graphs to model the financial network, asymptotic methods turned out to be powerful for the purpose of analytically describing the contagion process and making statements about resilience. So far, however, such methods have been limited to so-called rank-one models in which, informally speaking, the only parameter for the skeleton of the network is the degree sequence and the contagion process can be described by a one-dimensional fixed-point equation. Such networks fail to account for the possibility of a pronounced block structure such as core/periphery or a network composed of different connected blocks for different countries. We present a much more general model here, where we distinguish vertices (institutions) of different types and let edge probabilities and exposures depend on the types of both, the receiving and the sending vertex, plus additional parameters. Our main result allows one to compute explicitly the systemic damage caused by some initial local shock event, and we derive a complete characterization of resilient and nonresilient financial systems. This is the first instance that default contagion is rigorously studied in a model outside the class of rank-one models and several technical challenges arise. In contrast to previous work, in which networks could be classified as resilient or nonresilient independently of the distribution of the shock, information about the shock becomes important in our model and a more refined resilience condition arises. Among other applications of our theory we derive resilience conditions for the global network based on subnetwork conditions only.","PeriodicalId":47022,"journal":{"name":"International Journal of Theoretical and Applied Finance","volume":"1 1","pages":"2050053"},"PeriodicalIF":0.5,"publicationDate":"2020-12-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46614127","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-12-07DOI: 10.1142/s0219024920500569
A. Lipton, M. L. Prado
When prices reflect all available information, they oscillate around an equilibrium level. This oscillation is the result of the temporary market impact caused by waves of buyers and sellers. This price behavior can be approximated through an Ornstein–Uhlenbeck (OU) process. Market makers provide liquidity in an attempt to monetize this oscillation. They enter a long position when a security is priced below its estimated equilibrium level, and they enter a short position when a security is priced above its estimated equilibrium level. They hold that position until one of three outcomes occur: (1) they achieve the targeted profit; (2) they experience a maximum tolerated loss; (3) the position is held beyond a maximum tolerated horizon. All market makers are confronted with the problem of defining profit-taking and stop-out levels. More generally, all execution traders acting on behalf of a client must determine at what levels an order must be fulfilled. Those optimal levels can be determined by maximizing the trader’s Sharpe ratio in the context of OU processes via Monte Carlo experiments [M. López de Prado (2018) Advances in Financial Machine Learning. Hoboken, NJ, USA: John Wiley & Sons]. This paper develops an analytical framework and derives those optimal levels by using the method of heat potentials [A. Lipton & V. Kaushansky (2018) On the first hitting time density of an Ornstein–Uhlenbeck process, arXiv:1810.02390; A. Lipton & V. Kaushansky (2020a) On the first hitting time density for a reducible diffusion process, Quantitative Finance, doi:10.1080/14697688.2020.1713394].
当价格反映了所有可用信息时，它们就会在均衡水平附近波动。这种波动是买方和卖方波动造成的暂时市场冲击的结果。这种价格行为可以通过Ornstein-Uhlenbeck (OU)过程来近似。做市商提供流动性，试图将这种波动货币化。当证券的价格低于其估计的均衡水平时，他们进入多头头寸，当证券的价格高于其估计的均衡水平时，他们进入空头头寸。他们持有该头寸，直到出现以下三种结果之一:(1)他们实现了目标利润;(二)遭受最大可容忍损失的;(3)持仓超过最大可容忍范围。所有做市商都面临着定义获利了结和止损水平的问题。更一般地说，所有代表客户的执行交易员都必须决定在什么水平上必须履行订单。这些最优水平可以通过蒙特卡洛实验在OU过程中最大化交易者的夏普比率来确定[M]。López de Prado(2018)金融机器学习的进展。霍博肯，新泽西州，美国:约翰威利和儿子]。本文建立了一个分析框架，并利用热势法推导出最佳水平[A]。Lipton & V. Kaushansky(2018)关于Ornstein-Uhlenbeck过程的首次撞击时间密度的研究，中国机械工程学报，34 (4):1810.02390;a . Lipton, V. Kaushansky . [2020a].可约扩散过程的第一次撞击时间密度，数理统计，doi:10.1080/14697688.2020.1713394]。
{"title":"A CLOSED-FORM SOLUTION FOR OPTIMAL ORNSTEIN–UHLENBECK DRIVEN TRADING STRATEGIES","authors":"A. Lipton, M. L. Prado","doi":"10.1142/s0219024920500569","DOIUrl":"https://doi.org/10.1142/s0219024920500569","url":null,"abstract":"When prices reflect all available information, they oscillate around an equilibrium level. This oscillation is the result of the temporary market impact caused by waves of buyers and sellers. This price behavior can be approximated through an Ornstein–Uhlenbeck (OU) process. Market makers provide liquidity in an attempt to monetize this oscillation. They enter a long position when a security is priced below its estimated equilibrium level, and they enter a short position when a security is priced above its estimated equilibrium level. They hold that position until one of three outcomes occur: (1) they achieve the targeted profit; (2) they experience a maximum tolerated loss; (3) the position is held beyond a maximum tolerated horizon. All market makers are confronted with the problem of defining profit-taking and stop-out levels. More generally, all execution traders acting on behalf of a client must determine at what levels an order must be fulfilled. Those optimal levels can be determined by maximizing the trader’s Sharpe ratio in the context of OU processes via Monte Carlo experiments [M. López de Prado (2018) Advances in Financial Machine Learning. Hoboken, NJ, USA: John Wiley & Sons]. This paper develops an analytical framework and derives those optimal levels by using the method of heat potentials [A. Lipton & V. Kaushansky (2018) On the first hitting time density of an Ornstein–Uhlenbeck process, arXiv:1810.02390; A. Lipton & V. Kaushansky (2020a) On the first hitting time density for a reducible diffusion process, Quantitative Finance, doi:10.1080/14697688.2020.1713394].","PeriodicalId":47022,"journal":{"name":"International Journal of Theoretical and Applied Finance","volume":" ","pages":""},"PeriodicalIF":0.5,"publicationDate":"2020-12-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42358319","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-12-01DOI: 10.1142/s0219024920990010
{"title":"Author Index Volume 23 (2020)","authors":"","doi":"10.1142/s0219024920990010","DOIUrl":"https://doi.org/10.1142/s0219024920990010","url":null,"abstract":"","PeriodicalId":47022,"journal":{"name":"International Journal of Theoretical and Applied Finance","volume":" ","pages":""},"PeriodicalIF":0.5,"publicationDate":"2020-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47910161","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-11-02DOI: 10.1142/S021902492050051X
Kenichiro Shiraya
This paper presents a new approximation method for pricing multi-asset continuous single barrier options under general local stochastic volatility models. The formula applies an asymptotic expansion technique and an approximation for the distribution of the first exit time of diffusion processes. This method focuses on local stochastic volatility models with unknown characteristic function and transition density function. To the best of our knowledge, our approximation formula is the first to achieve analytic approximations for continuous barrier options prices in this environment. In numerical experiments, we confirm the validity of the formula.
{"title":"AN APPROXIMATION METHOD FOR PRICING CONTINUOUS BARRIER OPTIONS UNDER MULTI-ASSET LOCAL STOCHASTIC VOLATILITY MODELS","authors":"Kenichiro Shiraya","doi":"10.1142/S021902492050051X","DOIUrl":"https://doi.org/10.1142/S021902492050051X","url":null,"abstract":"This paper presents a new approximation method for pricing multi-asset continuous single barrier options under general local stochastic volatility models. The formula applies an asymptotic expansion technique and an approximation for the distribution of the first exit time of diffusion processes. This method focuses on local stochastic volatility models with unknown characteristic function and transition density function. To the best of our knowledge, our approximation formula is the first to achieve analytic approximations for continuous barrier options prices in this environment. In numerical experiments, we confirm the validity of the formula.","PeriodicalId":47022,"journal":{"name":"International Journal of Theoretical and Applied Finance","volume":" ","pages":""},"PeriodicalIF":0.5,"publicationDate":"2020-11-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44619451","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-11-01DOI: 10.1142/s021902492050048x
E. Platen, Renata Rendek
In practice, optimal portfolio construction for large stock markets has never been conclusively resolved because estimating the required means of returns with sufficient accuracy is a highly intractable task. By avoiding estimation, this paper approximates closely the growth optimal portfolio (GP) for the stocks of developed markets with a well-diversified, hierarchically weighted index (HWI). For stocks denominated in units of the HWI, their current value turns out to be strictly greater than their future expected values, which indicates the existence of stock price bubbles that could be systematically exploited for long-term asset management. It is shown that the HWI does not leave much room for significant performance improvements as proxy for the GP.
{"title":"APPROXIMATING THE GROWTH OPTIMAL PORTFOLIO AND STOCK PRICE BUBBLES","authors":"E. Platen, Renata Rendek","doi":"10.1142/s021902492050048x","DOIUrl":"https://doi.org/10.1142/s021902492050048x","url":null,"abstract":"In practice, optimal portfolio construction for large stock markets has never been conclusively resolved because estimating the required means of returns with sufficient accuracy is a highly intractable task. By avoiding estimation, this paper approximates closely the growth optimal portfolio (GP) for the stocks of developed markets with a well-diversified, hierarchically weighted index (HWI). For stocks denominated in units of the HWI, their current value turns out to be strictly greater than their future expected values, which indicates the existence of stock price bubbles that could be systematically exploited for long-term asset management. It is shown that the HWI does not leave much room for significant performance improvements as proxy for the GP.","PeriodicalId":47022,"journal":{"name":"International Journal of Theoretical and Applied Finance","volume":" ","pages":""},"PeriodicalIF":0.5,"publicationDate":"2020-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44903352","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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