Diversity-weighted portfolios with negative parameter

DOI10.1007/S10436-015-0263-3MaRDI QIDQ902178zbMATH OpenOpenAlexFDO

Authors Alexander Vervuurt, Ioannis Karatzas

Publication date 7 January 2016

Published in Annals of Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1504.01026

zbMATH Keywords

portfoliosstochastic portfolio theoryrelative arbitrageportfolio generating functionsdiversity-weighted portfolios

Mathematics Subject Classification ID

Portfolio theory (91G10) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Abstract: We analyze a negative-parameter variant of the diversity-weighted portfolio studied by Fernholz, Karatzas, and Kardaras (Finance Stoch 9(1):1-27, 2005), which invests in each company a fraction of wealth inversely proportional to the company's market weight (the ratio of its capitalization to that of the entire market). We show that this strategy outperforms the market with probability one, under a non-degeneracy assumption on the volatility structure and the assumption that the market weights admit a positive lower bound. Several modifications of this portfolio, which outperform the market under milder versions of this "no-failure" condition, are put forward, one of which is rank-based. An empirical study suggests that such strategies as studied here have indeed the potential to outperform the market and to be preferable investment opportunities, even under realistic proportional transaction costs.

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Cited in

(11)

• Model-free portfolio theory and its functional master formula
• The geometry of relative arbitrage
• Trading strategies generated by Lyapunov functions
• Information geometry in portfolio theory
• Analysis of variance based instruments for Ornstein-Uhlenbeck type models: swap and price index
• Open markets
• Managing portfolio diversity within the mean variance theory
• Simulation of diversified portfolios in continuous financial markets
• Permutation-weighted portfolios and the efficiency of commodity futures markets
• Diversified minimum-variance portfolios
• Market-to-book ratio in stochastic portfolio theory

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