Diversity-weighted portfolios with negative parameter
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Publication:902178
DOI10.1007/S10436-015-0263-3zbMATH Open1369.91167arXiv1504.01026OpenAlexW3099712572MaRDI QIDQ902178FDOQ902178
Authors: Alexander Vervuurt, Ioannis Karatzas 
Publication date: 7 January 2016
Published in: Annals of Finance (Search for Journal in Brave)
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.
Full work available at URL: https://arxiv.org/abs/1504.01026
Recommendations
portfoliosstochastic portfolio theoryrelative arbitrageportfolio generating functionsdiversity-weighted portfolios
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Cited In (11)
- Model-free portfolio theory and its functional master formula
- Information geometry in portfolio theory
- The geometry of relative arbitrage
- Trading strategies generated by Lyapunov functions
- Analysis of variance based instruments for Ornstein-Uhlenbeck type models: swap and price index
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- 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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