Outperforming the market portfolio with a given probability

DOI10.1214/11-AAP799zbMATH Open1259.60072arXiv1006.3224OpenAlexW3099268354MaRDI QIDQ453241FDOQ453241

Authors: Erhan Bayraktar, Yu-Jui Huang, Qingshuo Song 

Publication date: 19 September 2012

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: Our goal is to resolve a problem proposed by Fernholz and Karatzas [On optimal arbitrage (2008) Columbia Univ.]: to characterize the minimum amount of initial capital with which an investor can beat the market portfolio with a certain probability, as a function of the market configuration and time to maturity. We show that this value function is the smallest nonnegative viscosity supersolution of a nonlinear PDE. As in Fernholz and Karatzas [On optimal arbitrage (2008) Columbia Univ.], we do not assume the existence of an equivalent local martingale measure, but merely the existence of a local martingale deflator.

Full work available at URL: https://arxiv.org/abs/1006.3224

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zbMATH Keywords

quantile hedgingviscosity solutionsnonuniqueness of solutions of nonlinear PDEsoptimal arbitragestrict local martingale deflators

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Uniqueness problems for PDEs: global uniqueness, local uniqueness, non-uniqueness (35A02) Applications of stochastic analysis (to PDEs, etc.) (60H30) Actuarial science and mathematical finance (91G99)

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Cited In (7)

• Distribution of the time to explosion for one-dimensional diffusions
• A stochastic target approach for P\&L matching problems
• Portfolio management in the binomial model: conditions for outperforming benchmarks
• Quantile hedging in a semi-static market with model uncertainty
• Functional portfolio optimization in stochastic portfolio theory
• Diversity-weighted portfolios with negative parameter
• Outperformance portfolio optimization via the equivalence of pure and randomized hypothesis testing

Uses Software

• Mathematica

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