Trading strategies generated by Lyapunov functions

DOI10.1007/S00780-017-0332-8MaRDI QIDQ2364535zbMATH OpenOpenAlexDBLPWikidataFDO

Authors Johannes Ruf, Ioannis Karatzas

Publication date 21 July 2017

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

Copyright license Creative Commons Attribution 4.0 International

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

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)

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.

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Cited in

(24)

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

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