1,720,981 research outputs found
Robustness meets co-jumps: optimal consumption and portfolio choice with derivatives
No full textIn this paper, we study a robust, dynamic, continuous-time optimal consumption and portfolio allocation problem for investors with recursive preferences who have access to both stock and derivatives markets. We assume the stock price process follows a stochastic volatility model, with instantaneous precision as the unique state variable, allowing for discontinuities in all the dynamics. We obtain a closed-form approximate solution up to a system of ODEs to the optimization problem for a non-unitary value of the elasticity of intertemporal substitution of consumption, being able to derive an exact solution as a particular case. Our theoretical findings show that the optimal policies are remarkably affected by the ambiguity-aversion parameters to diffusive and jump risks. A detailed numerical analysis confirms the effectiveness of our theoretical results on real data. Finally, we prove that investors who do not believe in ambiguity may suffer considerable wealth losses
Co-jumps and recursive preferences in portfolio choices
Full text linkThis paper investigates a multivariate, dynamic, continuous-time optimal consumption and portfolio allocation problem when the investor faces recursive utilities. The economy we are considering is described through both diffusion and discontinuities in the dynamics. We derive an approximated closed-form solution to optimal rules by exploiting standard dynamic programming techniques. Our findings are manifold. First, we obtain dynamic optimal weights, inversely proportional to volatility. Second, we show that both co-jumps frequency and intensity play a crucial role, as they considerably
limit potential losses in the investors’ wealth. Third, we prove that jumps in precision reinforce the effect of jumps in price, further reducing optimal allocation. Finally, we highlight how co-jumps may influence investors’ choices regarding intertemporal consumption
Preface [to Annali del Dipartimento di Metodi e Modelli per l’Economia, il Territorio e la Finanza 2023]
No full textConstant or Variable? A Performance Analysis among Portfolio Insurance Strategies
Full text linkIn this paper, we propose a comparison among three portfolio insurance strategies, namely the constant proportion portfolio insurance, the time-invariant portfolio protection, and the exponential proportion portfolio insurance, via an in-depth performance analysis. We aim to ascertain whether strategies characterized by variable parameters can outperform those with constant parameters by measuring potential returns, investment riskiness, downside protection capability, and ability to capture market upside. The results, achieved in a model-free framework by exploiting bootstrapping techniques, advise that no winning strategy exists overall, even when considering different volatility regimes, rebalancing frequencies, and protection levels
An interval of no-arbitrage prices for American contingent claims in incomplete markets
Full text linkIn this paper we establish an arbitrage-free prices interval for American contingent claims in incomplete financial markets. Such an incom-
pleteness derives from considering uncertain volatility. We use the notion of G-expectation, under which the corresponding canonical path is a G-Brownian Motion, and the related Itˆo stochastic calculus on suitable stopping time intervals, in a standard financial market characterized by a risk-less asset and one risky stoc
Annali del Dipartimento di metodi e modelli per l'economia, il territorio e la finanza
Full text linkA quantization approach to the counterparty credit exposure estimation
Full text linkDuring recent years the counterparty risk field has received a growing attention because of the Basel Accord, which asks banks to fulfill finer conditions concerning counterparty credit exposures arising from banks’ derivatives, securities financing transactions, default and downgrade risks characterizing the Over The Counter derivatives market, etc. Consequently, the development of effective and more accurate measures of risk have been pushed, particularly focusing on the estimate of the future fair value of derivatives with respect to prescribed time horizon and fixed grid of time buckets. Common methods, used to treat the latter scenario, are mainly based on ad hoc
implementations of the Monte Carlo approach, characterized by a high computational cost, being strongly dependent on the number of considered assets. This is why many financial players moved to more effective and time saving technologies, e.g., based on grid computing and Graphics Processing Units (GPU) capabilities. In the present paper we exploit an alternative approach based on different algorithmic strategies by showing how to implement the quantization technique to derive accurate estimate for both pricing and volatility values. Our approach turns out to produce sharp results for the counterparty risk evaluation, with great computational benefits if compared to the Monte Carlo approach
Time‐invariant portfolio strategies in structured products with guaranteed minimum equity exposure
Full text linkWe introduce a new exotic option to be used within structured products to address a key disadvantage of standard time-invariant portfolio protection: the well-known cash-lock risk. Our approach suggests enriching the framework by including a threshold in the allocation mechanism so that a guaranteed minimum equity exposure (GMEE) is ensured at any point in time. To be able to offer such a solution still with hard capital protection, we apply an option-based structure with a dynamic allocation logic as underlying. We provide an in-depth analysis of the prices of such new exotic options, assuming a Heston–Vasicek-type financial market model, and compare our results with other options used within
structured products. Our approach represents an interesting alternative for investors aiming at downsizing protection via time-invariant portfolio protection strategies, meanwhile being also afraid to experience a cash-lock event triggered by market turmoils
Betting on bitcoin: a profitable trading between directional and shielding strategies
Full text linkIn this paper, we come up with an original trading strategy on Bitcoins. The methodology we propose is profit-oriented, and it is based on buying or selling the so-called Contracts for Difference, so that the investor’s gain, assessed at a given future time t, is obtained as the difference between the predicted Bitcoin price and an apt threshold. Starting from some empirical findings, and passing through the specification of a suitable theoretical model for the Bitcoin price process, we are able to provide possible investment scenarios, thanks to the use of a Recurrent Neural Network with a Long Short-Term Memory for predicting purposes
- …
