Functional portfolio optimization in stochastic portfolio theory
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Publication:5080133
DOI10.1137/21M1417715zbMATH Open1491.91114arXiv2103.10925OpenAlexW3136862634MaRDI QIDQ5080133FDOQ5080133
Authors: Steven W. Campbell, Ting-Kam Leonard Wong 
Publication date: 31 May 2022
Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)
Abstract: In this paper we develop a concrete and fully implementable approach to the optimization of functionally generated portfolios in stochastic portfolio theory. The main idea is to optimize over a family of rank-based portfolios parameterized by an exponentially concave function on the unit interval. This choice can be motivated by the long term stability of the capital distribution observed in large equity markets, and allows us to circumvent the curse of dimensionality. The resulting optimization problem, which is convex, allows for various regularizations and constraints to be imposed on the generating function. We prove an existence and uniqueness result for our optimization problem and provide a stability estimate in terms of a Wasserstein metric of the input measure. Then, we formulate a discretization which can be implemented numerically using available software packages and analyze its approximation error. Finally, we present empirical examples using CRSP data from the US stock market, including the performance of the portfolios allowing for dividends, defaults, and transaction costs.
Full work available at URL: https://arxiv.org/abs/2103.10925
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convex optimizationWasserstein metricportfolio optimizationstochastic portfolio theoryfunctionally generated portfolioexponentially concave functioncapital distribution
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Cited In (17)
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