Trading strategies generated by Lyapunov functions

DOI10.1007/S00780-017-0332-8zbMATH Open1414.91343DBLPjournals/fs/KaratzasR17arXiv1603.08245OpenAlexW2963969346WikidataQ59614078 ScholiaQ59614078MaRDI QIDQ2364535FDOQ2364535

Authors: Johannes Ruf, Ioannis Karatzas 

Publication date: 21 July 2017

Published in: Finance and Stochastics (Search for Journal in Brave)

Abstract: Functional portfolio generation, initiated by E.R. Fernholz almost twenty years ago, is a methodology for constructing trading strategies with controlled behavior. It is based on very weak and descriptive assumptions on the covariation structure of the underlying market model, and needs no estimation of model parameters. In this paper, the corresponding generating functions $G$ are interpreted as Lyapunov functions for the vector process $mu(cdot)$ of market weights; that is, via the property that $G(mu(cdot))$ is a supermartingale under an appropriate change of measure. This point of view unifies, generalizes, and simplifies several existing results, and allows the formulation of conditions under which it is possible to outperform the market portfolio over appropriate time-horizons. From a probabilistic point of view, the present paper yields results concerning the interplay of stochastic discount factors and concave transformations of semimartingales on compact domains.

Full work available at URL: https://arxiv.org/abs/1603.08245

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zbMATH Keywords

concavitystochastic portfolio theorysemimartingale propertydeflatorsrelative arbitragefunctional generationregular and Lyapunov functionstime horizons

Mathematics Subject Classification ID

Portfolio theory (91G10) Martingales with continuous parameter (60G44) Stochastic integrals (60H05) Applications of stochastic analysis (to PDEs, etc.) (60H30) Lyapunov and storage functions (93D30)

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Cited In (24)

• Polynomial processes in stochastic portfolio theory
• Robust asymptotic growth in stochastic portfolio theory under long‐only constraints
• Model‐free portfolio theory: A rough path approach
• Beating the market? A mathematical puzzle for market efficiency
• Volatility and arbitrage
• Open markets and hybrid Jacobi processes
• Trading strategies generated pathwise by functions of market weights
• Model-free portfolio theory and its functional master formula
• Leakage of rank-dependent functionally generated trading strategies
• Information geometry in portfolio theory
• A càdlàg rough path foundation for robust finance
• Functional portfolio optimization in stochastic portfolio theory
• Open markets
• Relative arbitrage: Sharp time horizons and motion by curvature
• Arbitrage theory in a market of stochastic dimension
• Quantifying dimensional change in stochastic portfolio theory
• Permutation-weighted portfolios and the efficiency of commodity futures markets
• Dynamics of observables in rank-based models and performance of functionally generated portfolios
• Dynamic mode decomposition for financial trading strategies
• Simultaneously long short trading in discrete and continuous time
• Exponentially concave functions and a new information geometry
• Market-to-book ratio in stochastic portfolio theory
• The Impact of Proportional Transaction Costs on Systematically Generated Portfolios
• Generalised Lyapunov Functions and Functionally Generated Trading Strategies

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