Markowitz (1952, 1959) first proposed a well-known mean-variance analysis for optimizing portfolio diversification that has been long served as a foundation of modern finance. The risk diversification was formulated by a quadratic optimization model. Unfortunately, the quadratic optimization had a computational difficulty in dealing with a large number of asset allocations. To enhance the comp...

Assuming elliptically contoured distribution for portfolio asset returns, we derive the exact marginal and joint densities of the global minimum variance portfolio variance, and weights estimators. We also construct a test for the hypothesis that the global minimum variance is less then or equal to a certain value. A stochastic representation and moments of its estimator is provided. We illustr...

Tobin (1958) has argued that in the face of potential capital losses on bonds it is reasonable to hold cash as a means to transfer wealth over time. It is shown that this assertion cannot be sustained taking into account the evolution of wealth of cash holders versus non cash holders. Cash holders will be driven out of the market in the long run by traders who only use a (risky) long-lived asse...

Tobin (1958) has argued that in the face of potential capital losses on bonds it is reasonable to hold cash as a means to transfer wealth over time. It is shown that this assertion cannot be sustained taking into account the evolution of wealth of cash holders versus non cash holders. Cash holders will be driven out of the market in the long run by traders who only use a (risky) long-lived asse...

The purpose of this paper is to suggest a new theory of portfolio selection which is based on evolutionary reasoning in simple repeated market situations. According to this new point of view the ultimate success of a portfolio strategy is measured by the wealth share the strategy is eventually able to conquer in an evolutionary process of market selection. We identify a simple portfolio strateg...

Abstract We provide the first systematic asset pricing analysis of one main safe categories, repurchase agreement (repo). Based on temporal and cross-sectional variation in short-term rates, we form a carry that, together with market factor, prices these near-money assets linear model. The depicts heterogeneity nonpecuniary convenience yields collateral increases safety premium liquidity reflec...

The purpose of this paper is to suggest a new theory of portfolio selection which is based on evolutionary reasoning in simple repeated market situations. According to this new point of view the ultimate success of a portfolio strategy is measured by the wealth share the strategy is eventually able to conquer in an evolutionary process of market selection. We identify a simple portfolio strateg...

This article studies an optimal stopping problem with an endogenous constraint on the set of admissible stopping times. The constraint stipulates that continuation is permitted, at any given date t, only if the endogenous reward achieved exceeds a prespecified threshold. Characterizations of the value function and the optimal stopping time are presented. An application to the pricing of corpora...

We introduce the multivariate Ornstein-Uhlenbeck process, solve it analytically, and discuss how it generalizes a vast class of continuous-time and discretetime multivariate processes. Relying on the simple geometrical interpretation of the dynamics of the Ornstein-Uhlenbeck process we introduce cointegration and its relationship to statistical arbitrage. We illustrate an application to swap co...

A fund’s performance is usually compared to the performance of an index or other funds. If a fund trails the benchmark, the fund manager is often replaced. We argue that this may lead to excessive risk-taking if fund managers differ in ability and have the opportunity to take excessive risk. To match the benchmark, fund managers may increase the risk of their portfolio even if this decreases th...