Portfolio management with benchmark related incentives under mean reverting processes

Nicolosi, Marco; Angelini, Flavio; Herzel, Stefano

doi:10.1007/s10479-017-2535-y

Cited by 24 publications

(28 citation statements)

References 26 publications

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“…Alternatively, we could go further with other models within similar substantial framework of Nicolosi's optimal strategy. Among these are Nicolosi et al (2018) and Herzel and Nicolosi (2019). Both provide the optimal solution for the fund manager, similar to Nicolosi (2018), who invests in one riskless asset and several risky assets.…”

Section: Discussionmentioning

confidence: 99%

On the optimal strategy for the hedge fund manager:An experimental investigation

Permana

2020

Cogent Business & Management

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Section: Discussionmentioning

confidence: 99%

On the optimal strategy for the hedge fund manager:An experimental investigation

Permana

2020

Cogent Business & Management

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“…The presence of perceived or actual mispricing is particularly important for investors. In a recent study, Nicolosi et al (2017) explore how fund managers allocate resources under benchmark-related incentives when volatilities are meanreverting. In such cases it could be optimal for under-performing fund manager to increase the exposure to idiosyncratic volatility in a bid to compensate the underperformance.…”

Section: Discussionmentioning

confidence: 99%

Idiosyncratic risk and the cross-section of stock returns: the role of mean-reverting idiosyncratic volatility

et al. 2018

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A key prediction of the Capital Asset Pricing Model (CAPM) is that idiosyncratic risk is not priced by investors because in the absence of frictions it can be fully diversified away. In the presence of constraints on diversification, refinements of the CAPM conclude that the part of idiosyncratic risk that is not diversified should be priced. Recent empirical studies yielded mixed evidence with some studies finding positive correlation between idiosyncratic risk and stock returns, while other studies reported none or even negative correlation. We examine whether idiosyncratic risk is priced by the stock market and what are the probable causes for the mixed evidence produced by other studies, using monthly data for the US market covering the period from 1980 until 2013. We find that one-period volatility forecasts are not significantly correlated with stock returns. The mean-reverting unconditional volatility, however, is a robust predictor of returns. Consistent with economic theory, the size of the premium depends on the degree of 'knowledge' of the security among market participants. In particular, the premium for Nasdaq-traded stocks is higher than that for NYSE and Amex stocks. We also find stronger correlation between idiosyncratic risk and B Habin Lee

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“…Relations (4.12) and (4.13) hold in the set T C ∩ [0, T ], where T C is the complement of T . In fact they follow from the fact that Q(t) −1 C(t) and Q(t) −1 B(t) satisfy (4.10)-(4.11) when C(t), B(t) satisfy (3.17) -(3.18), as it can be shown by following Brendle (2006) [7,Equations (28)- (29)]. Therefore, for any > 0 such thatt + < T , Q(t + )C(t + ) = C(t + ) and, by continuity of all the functions involved in the equality, Q(t)C(t) = C(t).…”

Section: Optimal Investment Under Partial Informationmentioning

confidence: 90%

The Value of Knowing the Market Price of Risk

2019

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This paper presents an optimal allocation problem in a financial market with one risk-free and one risky asset, when the market is driven by a stochastic market price of risk. We solve the problem in continuous time, for an investor with a Constant Relative Risk Aversion (CRRA) utility, under two scenarios: when the market price of risk is observable (the full information case), and when it is not (the partial information case). The corresponding market models are complete in the partial information case and incomplete in the other case, hence the two scenarios exhibit rather different features. We study how the access to more accurate information on the market price of risk affects the optimal strategies and we determine the maximal price that the investor would be willing to pay to get such information. In particular, we examine two cases of additional information, when an exact observation of the market price of risk is available either at time 0 only (the initial information case), or during the whole investment period (the dynamic information case).

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Portfolio management with benchmark related incentives under mean reverting processes

Cited by 24 publications

References 26 publications

On the optimal strategy for the hedge fund manager:An experimental investigation

On the optimal strategy for the hedge fund manager:An experimental investigation

Idiosyncratic risk and the cross-section of stock returns: the role of mean-reverting idiosyncratic volatility

The Value of Knowing the Market Price of Risk

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