A minimum variance result in continuous trading portfolio optimization

Article Abstract:

A model investment policy based on trading between a stock characterized by a Brownian motion price process and a riskless bond has been constructed for the purpose of portfolio optimization. The model delineates a self-financing portfolio strategy based on continual trading that achieves a specific level of wealth within a certain time frame with minimal risk. The strategy entails investing the amount of funds in the stock proportional to the difference between a constant and the portfolio gain. In the beginning, the portfolio is leveraged by heavily borrowing on the bond at the same rate as the return on the bond. The strategy involves a highly leveraged investment in the stock in early stages, and then the accumulation of the bond in later stages by reducing the amount invested in the stock and increase the amount invested in the bond.

Management, Finance, Stochastic analysis, Brownian motion, Financial research

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Mean-variance-instability portfolio analysis: a case of Taiwan's stock market

Article Abstract:

The 1983 study of Talpaz, Harpaz and Penson (THP) is replicated by applying their mean-variance-instability portfolio selection model to eight Taiwan stocks to demonstrate the impact of instability preference on the traditional mean-variance frontier. The stocks include Taiwan Cement, United Microelectronics, Wei Chuan Food, Far East Textile and Cathay Construction. Unlike the original THP study which found that Taiwan's high-frequency stocks have low variance, the empirical results of the new study show that these stocks have high variance. These findings suggest that investors in the Taiwan stock market like speculating in high-variance stocks, unlike American investors. They also indicate that short-selling may raise the risk of the portfolio when the investor prefers unstable stocks.

Securities & Commodities Exchanges, Securities and Commodity Exchanges, Security and commodity exchanges, Models, Taiwan, Stock-exchange, Stock exchanges, Securities, Investment analysis, Securities analysis, Taiwan Stock Exchange

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A dynamic, globally diversified, index neutral synthetic asset allocation strategy

Article Abstract:

A Bayesian approach to dynamic seemingly unrelated regression is examined. The approach can effectively and robustly predict the one-step ahead, conditional distribution of asset returns. Such an approach recognizes the time-varying characteristic of global capital markets. A single-factor return model is derived through the use of predictive moments, once an index portfolio is specified. Globally diversified, synthetic portfolios are constructed, with excess returns designed to be uncorrelated with those of the index portfolio of the investor. The synthetic portfolios comprise exposures to currency-hedged equity indexes, currency-hedged government bonds and currency forward exchange contracts.

Usage, Bayesian statistical decision theory, Bayesian analysis

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