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Correlation, hierarchies, and networks in financial markets

Tumminello, M.; Lillo, F.; Mantegna, R. N.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 26/09/2008 Português
Relevância na Pesquisa
45.7%
We discuss some methods to quantitatively investigate the properties of correlation matrices. Correlation matrices play an important role in portfolio optimization and in several other quantitative descriptions of asset price dynamics in financial markets. Specifically, we discuss how to define and obtain hierarchical trees, correlation based trees and networks from a correlation matrix. The hierarchical clustering and other procedures performed on the correlation matrix to detect statistically reliable aspects of the correlation matrix are seen as filtering procedures of the correlation matrix. We also discuss a method to associate a hierarchically nested factor model to a hierarchical tree obtained from a correlation matrix. The information retained in filtering procedures and its stability with respect to statistical fluctuations is quantified by using the Kullback-Leibler distance.; Comment: 37 pages, 9 figures, 3 tables

Double Whammy - How ICT Projects are Fooled by Randomness and Screwed by Political Intent

Budzier, Alexander; Flyvbjerg, Bent
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 16/04/2013 Português
Relevância na Pesquisa
45.74%
The cost-benefit analysis formulates the holy trinity of objectives of project management - cost, schedule, and benefits. As our previous research has shown, ICT projects deviate from their initial cost estimate by more than 10% in 8 out of 10 cases. Academic research has argued that Optimism Bias and Black Swan Blindness cause forecasts to fall short of actual costs. Firstly, optimism bias has been linked to effects of deception and delusion, which is caused by taking the inside-view and ignoring distributional information when making decisions. Secondly, we argued before that Black Swan Blindness makes decision-makers ignore outlying events even if decisions and judgements are based on the outside view. Using a sample of 1,471 ICT projects with a total value of USD 241 billion - we answer the question: Can we show the different effects of Normal Performance, Delusion, and Deception? We calculated the cumulative distribution function (CDF) of (actual-forecast)/forecast. Our results show that the CDF changes at two tipping points - the first one transforms an exponential function into a Gaussian bell curve. The second tipping point transforms the bell curve into a power law distribution with the power of 2. We argue that these results show that project performance up to the first tipping point is politically motivated and project performance above the second tipping point indicates that project managers and decision-makers are fooled by random outliers...

Value-Based Inventory Management

Michalski, Grzegorz
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 16/01/2013 Português
Relevância na Pesquisa
55.6%
The basic financial purpose of a firm is to maximize its value. An inventory management system should also contribute to realization of this basic aim. Many current asset management models currently found in financial management literature were constructed with the assumption of book profit maximization as basic aim. However these models could lack what relates to another aim, i.e., maximization of enterprise value. This article presents a modified value-based inventory management model.; Comment: no coments

Why Indexing Works

Heaton, J. B.; Polson, N. G.; Witte, J. H.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 13/10/2015 Português
Relevância na Pesquisa
45.74%
We develop a simple stock selection model to explain why active equity managers tend to underperform a benchmark index. We motivate our model with the empirical observation that the best performing stocks in a broad market index perform much better than the other stocks in the index. While randomly selecting a subset of securities from the index increases the chance of outperforming the index, it also increases the chance of underperforming the index, with the frequency of underperformance being larger than the frequency of overperformance. The relative likelihood of underperformance by investors choosing active management likely is much more important than the loss to those same investors of the higher fees for active management relative to passive index investing. Thus, the stakes for finding the best active managers may be larger than previously assumed.; Comment: 5 Pages, 1 Figure

A liability tracking approach to long term management of pension funds

Ieda, Masashi; Yamashita, Takashi; Nakano, Yumiharu
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 16/03/2013 Português
Relevância na Pesquisa
55.57%
We propose a long term portfolio management method which takes into account a liability. Our approach is based on the LQG (Linear, Quadratic cost, Gaussian) control problem framework and then the optimal portfolio strategy hedges the liability by directly tracking a benchmark process which represents the liability. Two numerical results using empirical data published by Japanese organizations are served: simulations tracking an artificial liability and an estimated liability of Japanese organization. The latter one demonstrates that our optimal portfolio strategy can hedge his or her liability.

A general "bang-bang" principle for predicting the maximum of a random walk

Allaart, Pieter C.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 03/10/2009 Português
Relevância na Pesquisa
45.69%
Let $(B_t)_{0\leq t\leq T}$ be either a Bernoulli random walk or a Brownian motion with drift, and let $M_t:=\max\{B_s: 0\leq s\leq t\}$, $0\leq t\leq T$. This paper solves the general optimal prediction problem \sup_{0\leq\tau\leq T}\sE[f(M_T-B_\tau)], where the supremum is over all stopping times $\tau$ adapted to the natural filtration of $(B_t)$, and $f$ is a nonincreasing convex function. The optimal stopping time $\tau^*$ is shown to be of "bang-bang" type: $\tau^*\equiv 0$ if the drift of the underlying process $(B_t)$ is negative, and $\tau^*\equiv T$ is the drift is positive. This result generalizes recent findings by S. Yam, S. Yung and W. Zhou [{\em J. Appl. Probab.} {\bf 46} (2009), 651--668] and J. Du Toit and G. Peskir [{\em Ann. Appl. Probab.} {\bf 19} (2009), 983--1014], and provides additional mathematical justification for the dictum in finance that one should sell bad stocks immediately, but keep good ones as long as possible.; Comment: 13 pages

Price Impact

Bouchaud, J. P.; Management, Capital Fund
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 13/03/2009 Português
Relevância na Pesquisa
55.72%
We define what "Price Impact" means, and how it is measured and modelled in the recent literature. Although this notion seems to convey the idea of a forceful and intuitive mechanism, we discuss why things might not be that simple. Empirical studies show that while the correlation between signed order flow and price changes is strong, the impact of trades on prices is neither linear in volume nor permanent. Impact allows private information to be reflected in prices, but by the same token, random fluctuations in order flow must also contribute to the volatility of markets.; Comment: Entry for the upcoming "Encyclopedia of Quantitative Finance"

A stochastic reachability approach to portfolio construction in finance industry

Pola, Giordano; Pola, Gianni
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 19/07/2009 Português
Relevância na Pesquisa
55.71%
In finance industry portfolio construction deals with how to divide the investors' wealth across an asset-classes' menu in order to maximize the investors' gain. Main approaches in use at the present are based on variations of the classical Markowitz model. However, recent evolutions of the world market showed limitations of this method and motivated many researchers and practitioners to study alternative methodologies to portfolio construction. In this paper we propose one approach to optimal portfolio construction based on recent results on stochastic reachability, which overcome some of the limits of current approaches. Given a sequence of target sets that the investors would like their portfolio to stay within, the optimal portfolio allocation is synthesized in order to maximize the joint probability for the portfolio value to fulfill the target sets requirements. A case study in the US market is given which shows benefits from the proposed methodology in portfolio construction. A comparison with traditional approaches is included.; Comment: 15 pages, 7 figures

The Effects of Market Properties on Portfolio Diversification in the Korean and Japanese Stock Markets

Eom, Cheoljun; Park, Jongwon; Jung, Woo-Sung; Kaizoji, Taisei; Kim, Yong H.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 22/02/2009 Português
Relevância na Pesquisa
45.72%
In this study, we have investigated empirically the effects of market properties on the degree of diversification of investment weights among stocks in a portfolio. The weights of stocks within a portfolio were determined on the basis of Markowitz's portfolio theory. We identified that there was a negative relationship between the influence of market properties and the degree of diversification of the weights among stocks in a portfolio. Furthermore, we noted that the random matrix theory method could control the properties of correlation matrix between stocks; this may be useful in improving portfolio management for practical application.

Online Portfolio Selection: A Survey

Li, Bin; Hoi, Steven C. H.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Português
Relevância na Pesquisa
45.75%
Online portfolio selection is a fundamental problem in computational finance, which has been extensively studied across several research communities, including finance, statistics, artificial intelligence, machine learning, and data mining, etc. This article aims to provide a comprehensive survey and a structural understanding of published online portfolio selection techniques. From an online machine learning perspective, we first formulate online portfolio selection as a sequential decision problem, and then survey a variety of state-of-the-art approaches, which are grouped into several major categories, including benchmarks, "Follow-the-Winner" approaches, "Follow-the-Loser" approaches, "Pattern-Matching" based approaches, and "Meta-Learning Algorithms". In addition to the problem formulation and related algorithms, we also discuss the relationship of these algorithms with the Capital Growth theory in order to better understand the similarities and differences of their underlying trading ideas. This article aims to provide a timely and comprehensive survey for both machine learning and data mining researchers in academia and quantitative portfolio managers in the financial industry to help them understand the state-of-the-art and facilitate their research and practical applications. We also discuss some open issues and evaluate some emerging new trends for future research directions.; Comment: 33 pages

Coal Enterprise Management and Asynchronism of Return

Qiao, Kenan
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 09/11/2012 Português
Relevância na Pesquisa
55.76%
For researching the association between coal enterprise management and return in financial market, this paper applies the method of time difference relevance and PageRank method to seek the leader-index of a stock set containing 21 coal enterprises in A-share market and score those stocks. Based on the return in 2011, the asynchronism of the return series is revealed and presents a hierarchical structure of our stock set. Finally, we compare the result with the firm-level variables and discuss the relation between them. The results show that those large coal enterprises with a good management condition always present an antecedence of stock return; there is a significant positive association between company scale and the score given by PageRank method.

Relative Robust Portfolio Optimization

Hauser, Raphael; Krishnamurthy, Vijay; Tütüncü, Reha
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Português
Relevância na Pesquisa
45.72%
Considering mean-variance portfolio problems with uncertain model parameters, we contrast the classical absolute robust optimization approach with the relative robust approach based on a maximum regret function. Although the latter problems are NP-hard in general, we show that tractable inner and outer approximations exist in several cases that are of central interest in asset management.

A dual characterization of self-generation and exponential forward performances

Žitković, Gordan
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Português
Relevância na Pesquisa
45.69%
We propose a mathematical framework for the study of a family of random fields--called forward performances--which arise as numerical representation of certain rational preference relations in mathematical finance. Their spatial structure corresponds to that of utility functions, while the temporal one reflects a Nisio-type semigroup property, referred to as self-generation. In the setting of semimartingale financial markets, we provide a dual formulation of self-generation in addition to the original one, and show equivalence between the two, thus giving a dual characterization of forward performances. Then we focus on random fields with an exponential structure and provide necessary and sufficient conditions for self-generation in that case. Finally, we illustrate our methods in financial markets driven by It\^o-processes, where we obtain an explicit parametrization of all exponential forward performances.; Comment: Published in at http://dx.doi.org/10.1214/09-AAP607 the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org)

Optimal Position Management for a Market Maker with Stochastic Price Impacts

Fujii, Masaaki
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Português
Relevância na Pesquisa
45.74%
This paper deals with an optimal position management problem for a market maker who has to face uncertain customer order flows in an illiquid market, where the market maker's continuous trading incurs a stochastic linear price impact. Although the execution timing is uncertain, the market maker can also ask its OTC counterparties to transact a block trade without causing a direct price impact. We adopt quite generic stochastic processes of the securities, order flows, price impacts, quadratic penalties as well as security borrowing/lending rates. The solution of the market maker's optimal position-management strategy is represented by a stochastic Hamilton-Jacobi-Bellman equation, which can be decomposed into three (one non-linear and two linear) backward stochastic differential equations (BSDEs). We provide the verification using the standard BSDE techniques for a single security case. For a multiple-security case, we make use of the connection of the non-linear BSDE to a special type of backward stochastic Riccati differential equation (BSRDE) whose properties were studied by Bismut(1976). We also propose a perturbative approximation scheme for the resultant BSRDE, which only requires a system of linear ODEs to be solved at each expansion order. Its justification and the convergence rate are also given.; Comment: Revised and extended. Convergence of the approximation scheme is added

Computation of vector sublattices and minimal lattice-subspaces of R^k. Applications in finance

Katsikis, V. N.; Polyrakis, I. A.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 18/06/2010 Português
Relevância na Pesquisa
45.69%
In this article we perform a computational study of Polyrakis algorithms presented in [12,13]. These algorithms are used for the determination of the vector sublattice and the minimal lattice-subspace generated by a finite set of positive vectors of R^k. The study demonstrates that our findings can be very useful in the field of Economics, especially in completion by options of security markets and portfolio insurance.; Comment: 22 pages

Large-scale empirical study on pairs trading for all possible pairs of stocks listed on the first section of the Tokyo Stock Exchange

Murota, Mitsuaki; Inoue, Jun-ichi
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Português
Relevância na Pesquisa
45.77%
We carry out a large-scale empirical data analysis to examine the efficiency of the so-called pairs trading. On the basis of relevant three thresholds, namely, starting, profit-taking, and stop-loss for the `first-passage process' of the spread (gap) between two highly-correlated stocks, we construct an effective strategy to make a trade via `active' stock-pairs automatically. The algorithm is applied to $1,784$ stocks listed on the first section of the Tokyo Stock Exchange leading up to totally $1,590,436$ pairs. We are numerically confirmed that the asset management by means of the pairs trading works effectively at least for the past three years (2010-2012) data sets in the sense that the profit rate becomes positive (totally positive arbitrage) in most cases of the possible combinations of thresholds corresponding to `absorbing boundaries' in the literature of first-passage processes.; Comment: 19 pages, 14 figures, using svjour3.cls

The Kelly growth optimal strategy with a stop-loss rule

Nielsen, Mads
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Português
Relevância na Pesquisa
55.63%
From the Hamilton-Jacobi-Bellman equation for the value function we derive a non-linear partial differential equation for the optimal portfolio strategy (the dynamic control). The equation is general in the sense that it does not depend on the terminal utility and provides additional analytical insight for some optimal investment problems with known solutions. Furthermore, when boundary conditions for the optimal strategy can be established independently, it is considerably simpler than the HJB to solve numerically. Using this method we calculate the Kelly growth optimal strategy subject to a periodically reset stop-loss rule.; Comment: 13 pages, 4 figures. Submitted to Quantitative Finance 29 May 2013

Weakly nonlinear analysis of the Hamilton-Jacobi-Bellman equation arising from pension savings management

Macova, Zuzana; Sevcovic, Daniel
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Português
Relevância na Pesquisa
55.77%
The main purpose of this paper is to analyze solutions to a fully nonlinear parabolic equation arising from the problem of optimal portfolio construction. We show how the problem of optimal stock to bond proportion in the management of pension fund portfolio can be formulated in terms of the solution to the Hamilton-Jacobi-Bellman equation. We analyze the solution from qualitative as well as quantitative point of view. We construct useful bounds of solution yielding estimates for the optimal value of the stock to bond proportion in the portfolio. Furthermore we construct asymptotic expansions of a solution in terms of a small model parameter. Finally, we perform sensitivity analysis of the optimal solution with respect to various model parameters and compare analytical results of this paper with the corresponding known results arising from time-discrete dynamic stochastic optimization model.; Comment: 20 pages

Diversity-Weighted Portfolios with Negative Parameter

Vervuurt, Alexander; Karatzas, Ioannis
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Português
Relevância na Pesquisa
45.69%
We analyze a negative-parameter variant of the diversity-weighted portfolio studied by Fernholz, Karatzas, and Kardaras (Finance Stoch 9(1):1-27, 2005), which invests in each company a fraction of wealth inversely proportional to the company's market weight (the ratio of its capitalization to that of the entire market). We show that this strategy outperforms the market with probability one, under a non-degeneracy assumption on the volatility structure and the assumption that the market weights admit a positive lower bound. Several modifications of this portfolio, which outperform the market under milder versions of this "no-failure" condition, are put forward, one of which is rank-based. An empirical study suggests that such strategies as studied here have indeed the potential to outperform the market and to be preferable investment opportunities, even under realistic proportional transaction costs.; Comment: 25 pages

Efficient Discretization of Stochastic Integrals

Fukasawa, Masaaki
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 03/04/2012 Português
Relevância na Pesquisa
45.69%
Sharp asymptotic lower bounds of the expected quadratic variation of discretization error in stochastic integration are given. The theory relies on inequalities for the kurtosis and skewness of a general random variable which are themselves seemingly new. Asymptotically efficient schemes which attain the lower bounds are constructed explicitly. The result is directly applicable to practical hedging problem in mathematical finance; it gives an asymptotically optimal way to choose rebalancing dates and portofolios with respect to transaction costs. The asymptotically efficient strategies in fact reflect the structure of transaction costs. In particular a specific biased rebalancing scheme is shown to be superior to unbiased schemes if transaction costs follow a convex model. The problem is discussed also in terms of the exponential utility maximization.