This paper derives in closed form the optimal dynamic portfolio policy when trading is costly and security returns are predictable by signals with different mean-reversion speeds. The optimal updated portfolio is a linear combination of the existing portfolio, the optimal portfolio absent trading costs, and the optimal portfolio based on future expected returns and transaction costs. Predictors...

The regression of stock returns on predictive variables, such as dividend yield, has proven useful in optimal portfolio selection when investment opportunities are timevarying. Conditional versions of factor models impose a restriction on that regression, thereby implying a particular portfolio choice. The study examines several pricing models from a perspective of conditional mean-variance opt...

All HARA-utility investors with the same exponent invest in a single risky fund and the risk-free asset. In a continuous time-model stock proportions are proportional to the inverse local relative risk aversion of the investor (1/γ-rule). This paper analyses the conditions under which the optimal buy and hold-portfolio of a HARA-investor can be approximated by the optimal portfolio of an invest...

In this paper, optimal consumption and investment decisions are studied for an investor who can invest in a fixed interest rate bank account and a stock whose price is a log normal diffusion. We present the method of the HJB equation in order to explicitly solve problems of this type with modifications such as a fixed percentage transaction cost and a mandatory bequest function. It is shown tha...

This paper proposes a consistent approach to the pricing of weather derivatives. Since weather derivatives are traded in an incomplete market setting, standard hedging based pricing methods cannot be applied. The growth optimal portfolio, which is interpreted as a world stock index, is used as a benchmark or numeraire such that all benchmarked derivative price processes are martingales. No meas...

Aim of this paper is to characterize different risk measures in portfolio construction on seven Central and South-East European stock markets; Slovenia, Croatia, Hungary, Poland, Chez Republic, Romania and Turkey. Selected countries are members of EU, except Croatia and Turkey which have candidate status. Empirical part of this paper consists of three stages; at first descriptive statistics on ...

We propose a robust portfolio optimization approach based on quantile statistics. The proposed method is robust to extreme events in asset returns, and accommodates large portfolios under limited historical data. Specifically, we show that the risk of the estimated portfolio converges to the oracle optimal risk with parametric rate under weakly dependent asset returns. The theory does not rely ...

Starting from the reward-risk model for portfolio selection introduced in De Giorgi (2004), we derive the reward-risk Capital Asset Pricing Model (CAPM) analogously to the classical mean-variance CAPM. The reward-risk portfolio selection arises from an axiomatic definition of reward and risk measures based on few basic principles, including consistency with second order stochastic dominance. Wi...

If only we always knew ahead of time.... The dream of any stock portfolio manager 1 is to allocate stocks in his portfolio in hindsight so as to always reach maximum 2 wealth. With hindsight, over a given time period, the best strategy is to invest into 3 the best performing stock over that period. However, even this appealing strategy is 4 not without regret. Reallocating everyday to the best ...

In the continuous time-Merton-model the instantaneous stock proportions are inversely proportional to the investor´s local relative risk aversion γ. This paper analyses the conditions under which a HARA-investor can use this 1/γ-rule to approximate her optimal portfolio in a finite time setting without material effects on the certainty equivalent of the portfolio payoff. The approximation is of...