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Jump-diffusion risk-sensitive benchmarked asset management with traditional and alternative data.
- Source :
- Annals of Operations Research; May2024, Vol. 336 Issue 1/2, p661-689, 29p
- Publication Year :
- 2024
-
Abstract
- This paper addresses errors in mean return estimates in continuous-time asset allocation models. A standard approach postulates that stochastic factors explain expected asset returns. The problem is then to estimate these factors from observed asset prices via filtering. Recent advances have also combined asset prices with expert opinions to improve the estimates. However, these methods have limitations: stocks prices favor momentum strategies, and expert opinions require careful debiasing. To resolve these issues, we propose a jump-diffusion risk-sensitive benchmarked asset management model in which investors estimate the factors from both traditional and alternative data. We show that this model admits a unique C 1 , 2 solution, and we derive the optimal investment policy in quasi-closed form. We find that investors construct their portfolios from a passive core and an active satellite. The passive core adds considerations for jump risk to a simple benchmark replication. The active satellite blends security selection, and factor tilts with event-driven strategies unique to jump-diffusion problems. Thus, our model explains the most popular investment strategies. Furthermore, the improved expert forecast model and the introduction of alternative data provide factor tilters with new tools to sharpen their asset allocation. [ABSTRACT FROM AUTHOR]
- Subjects :
- ASSET management
INVESTORS
ASSET allocation
RETURN on assets
PRICES
INVESTMENT policy
Subjects
Details
- Language :
- English
- ISSN :
- 02545330
- Volume :
- 336
- Issue :
- 1/2
- Database :
- Complementary Index
- Journal :
- Annals of Operations Research
- Publication Type :
- Academic Journal
- Accession number :
- 177190169
- Full Text :
- https://doi.org/10.1007/s10479-022-05130-3