Jump-diffusion risk-sensitive benchmarked asset management with traditional and alternative data

Mark Davis and Sebastien Lleo
Additional contact information
Mark Davis: Imperial College London

Annals of Operations Research, 2024, vol. 336, issue 1, No 21, 689 pages

Abstract: 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 $$C^{1,2}$$ 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.

Keywords: Alternative data; Benchmark; Expert opinions; Filtering; Jump-diffusion processes; Risk-sensitive stochastic control (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10479-022-05130-3 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:annopr:v:336:y:2024:i:1:d:10.1007_s10479-022-05130-3

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479

DOI: 10.1007/s10479-022-05130-3

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().