Exponentially concave functions and high dimensional stochastic portfolio theory

DOI10.1016/J.SPA.2018.09.004zbMATH Open1422.91665arXiv1603.01865OpenAlexW2963413755WikidataQ129222159 ScholiaQ129222159MaRDI QIDQ2274294FDOQ2274294

Authors: Soumik Pal 

Publication date: 19 September 2019

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: We consider the following problem in stochastic portfolio theory. Are there portfolios that are relative arbitrages with respect to the market portfolio over very short periods of time under realistic assumptions? We answer a slightly relaxed question affirmative in the following high dimensional sense, where dimension refers to the number of stocks being traded. Very roughly, suppose that for every dimension we have a continuous semimartingale market such that (i) the vector of market weights in decreasing order has a stationary regularly varying tail with an index between $-1$ and $-1/2$ and (ii) zero is not a limit point of the relative volatilities of the stocks. Then, given a probability $eta<1$ arbitrarily close to one, two arbitrarily small $epsilon,delta>0$, and an arbitrarily high positive amount $M$, for all high enough dimensions, it is possible to construct a functionally generated portfolio such that, with probability at least $eta$, its relative value with respect to the market at time $delta$ is at least $M$, and never goes below $(1-epsilon)$ during $[0,delta]$. There are two phase transitions; if the index of the tail is less than $-1$ or larger than $-1/2$. The construction uses properties of regular variation, high-dimensional convex geometry and concentration of measure under Dirichlet distributions. We crucially use the notion of $(K,N)$ convex functions introduced by Erbar, Kuwada, Sturm in the context of curvature-dimension conditions and Bochner's inequalities.

Full work available at URL: https://arxiv.org/abs/1603.01865

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zbMATH Keywords

stochastic portfolio theoryrelative arbitrageexponentially concave functionshigh-dimensional financeshort term arbitrage

Mathematics Subject Classification ID

Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Diffusion processes (60J60) Portfolio theory (91G10) Transition functions, generators and resolvents (60J35)

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Cited In (8)

• A novel fuzzy dominant goal programming for portfolio selection with systematic risk and non-systematic risk
• New weighted generalizations for differentiable exponentially convex mapping with application
• Functional portfolio optimization in stochastic portfolio theory
• Title not available (Why is that?)
• Relative arbitrage: Sharp time horizons and motion by curvature
• Title not available (Why is that?)
• Extended gradient of convex function and capital allocation
• Multiplicative Schrödinger problem and the Dirichlet transport

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