Generalized Lyapunov functions and functionally generated trading strategies

Johannes Ruf and Kangjianan Xie

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper investigates the dependence of functional portfolio generation, introduced by Fernholz (1999), on an extra finite variation process. The framework of Karatzas and Ruf (2017) is used to formulate conditions on trading strategies to be strong arbitrage relative to the market over sufficiently large time horizons. A mollification argument and Komlós theorem yield a general class of potential arbitrage strategies. These theoretical results are complemented by several empirical examples using data from the S&P 500 stocks.

Keywords: additive generation; Lyapunov function; market diversity; multiplicative generation; portfolio analysis; portfolio generating function; regular function; S&P 500; Stochastic Portfolio Theory (search for similar items in EconPapers)
JEL-codes: F3 G3 J1 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2019-09-18
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Applied Mathematical Finance, 18, September, 2019, 26(4), pp. 293-327. ISSN: 1350-486X

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