APPROXIMATING THE GROWTH OPTIMAL PORTFOLIO AND STOCK PRICE BUBBLES

Eckhard Platen () and Renata Rendek ()
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Renata Rendek: Quantitative Finance Research Centre, University of Technology Sydney, Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 07, 1-33

Abstract: In practice, optimal portfolio construction for large stock markets has never been conclusively resolved because estimating the required means of returns with sufficient accuracy is a highly intractable task. By avoiding estimation, this paper approximates closely the growth optimal portfolio (GP) for the stocks of developed markets with a well-diversified, hierarchically weighted index (HWI). For stocks denominated in units of the HWI, their current value turns out to be strictly greater than their future expected values, which indicates the existence of stock price bubbles that could be systematically exploited for long-term asset management. It is shown that the HWI does not leave much room for significant performance improvements as proxy for the GP.

Keywords: Growth optimal portfolio; hierarchical diversification; strict supermartingale property; benchmark approach; stock price bubbles (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S021902492050048X

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