arXiv research

This paper studies the concept of instantaneous arbitrage in continuous time and its relation to the instantaneous CAPM. Absence of instantaneous arbitrage is equivalent to the existence of a trading strategy which satisfies the CAPM beta pricing relation in place of the market. Thus the difference between the arbitrag…

The Capital Asset Pricing Model (CAPM) is one of the original models in explaining risk-return relationship in the financial market. However, when applying the CAPM into reality, it demonstrates a lot of shortcomings. While improving the performance of the model, many studies, on one hand, have attempted to apply diffe…

The CAPM's market returns are endogenously determined, affecting all assets' expected returns.

In this paper we test computationally the performance of CAPM in an evolutionary setting. In particular we study the stability of wealth distribution in a financial market where some traders invest as prescribed by CAPM and others behave according to different portfolio rules. Our study is motivated by recent analytica…

We consider a Black-Scholes market in which a number of stocks and an index are traded. The simplified Capital Asset Pricing Model is the conjunction of the usual Capital Asset Pricing Model, or CAPM, and the statement that the appreciation rate of the index is equal to its squared volatility plus the interest rate. (T…

The principal portfolios of the standard Capital Asset Pricing Model (CAPM) are analyzed and found to have remarkable hedging and leveraging properties. Principal portfolios implement a recasting of any correlated asset set of N risky securities into an equivalent but uncorrelated set when short sales are allowed. Whil…

We add size factor to CAPM and normalize residuals by Volatility Index.

CAPM interpretation is flawed; beta reflects proxy for underlying driver, not causal transmission.

The paper has 2 main goals: 1. We propose a variant of the CAPM based on coherent risk. 2. In addition to the real-world measure and the risk-neutral measure, we propose the third one: the extreme measure. The introduction of this measure provides a powerful tool for investigating the relation between the first two mea…

Traders underestimated risk-free rates, leading to poor investments.

Machine learning models outperform traditional CAPM in forecasting financial asset prices.

This paper examines the validity of the Capital Asset Pricing Model (CAPM) on the Ugandan stock market using monthly stock returns from 10 of the 11 companies listed on the Uganda Stock Exchange (USE), for the period 1st March 2007 to 10th November 2009. Due to the absence of readily available Uganda Stock Exchange(USE…

Paper tackles P vs NP problem in portfolio optimization with cardinality constraints and Black-Scholes derivatives.

The paper examines the Chinese market reaction to the ADR issue by comparing returns and their stochastic variances of the Chinese firms cross-listed in the U.S. stock market. First, It was implemented capital asset pricing model (CAPM) to determine expected returns A and N shares. The CAPM provided with a methodology …

Study finds it hard to establish common factor pricing in corporate bonds.

We find that the CAPM fails to explain the small firm effect even if its non-parametric form is used which allows time-varying risk and non-linearity in the pricing function. Furthermore, the linearity of the CAPM can be rejected, thus the widely used risk and performance measures, the beta and the alpha, are biased an…

Corporate bond factor research is flawed due to measurement errors and ex-post filtering.

A new perspective on portfolio selection using realized returns.

Hedge Funds are considered as one of the portfolio management sectors which shows a fastest growing for the past decade. An optimal Hedge Fund management requires an appropriate risk metrics. The classic CAPM theory and its Ratio Sharpe fail to capture some crucial aspects due to the strong non-Gaussian character of He…

Empirical study of CAPM and Fama-French model in Chinese A-share market.

We present conditions under which positive alpha exists in the realm of active portfolio management- in contrast to the controversial result in Jarrow (2010, pg. 20) which implicates delegated portfolio management by surmising that positive alphas are illusionary. Specifically, we show that the critical assumption used…

The paper refutes standard asset pricing models and introduces new theories.

This paper gives yet another definition of game-theoretic probability in the context of continuous-time idealized financial markets. Without making any probabilistic assumptions (but assuming positive and continuous price paths), we obtain a simple expression for the equity premium and derive a version of the capital a…

The paper analyzes how ESG investors can prioritize green stocks without sacrificing overall wealth.

This article investigates the evolution of the Mexican stock market integration into the world market. First, we estimate the time-varying Mexican degree of market integration using an international conditional version of the CAPM with segmentation effects. Second, we study the structural breaks in this series. Finally…

Without probability theory, we define classes of supermartingales, martingales, and semimartingales in idealized financial markets with continuous price paths. This allows us to establish probability-free versions of a number of standard results in martingale theory, including the Dubins-Schwarz theorem, the Girsanov t…

In this article, we investigate whether exchange rate risk is priced. We use a multivariate GARCH-in-Mean specification and test alternative conditional international CAPM versions. Our results support strongly the international asset-pricing model that includes exchange rate risk for both developed and emerging stock …

We generalize the Arbitrage Pricing Theory (APT) to include the contribution of virtual arbitrage opportunities. We model the arbitrage return by a stochastic process. The latter is incorporated in the APT framework to calculate the correction to the APT due to the virtual arbitrage opportunities. The resulting relatio…

Study examines tech stocks' reactions to Facebook data leak scandal.

We derive formulas for the performance of capital assets in continuous time from an efficient market hypothesis, with no stochastic assumptions and no assumptions about the beliefs or preferences of investors. Our efficient market hypothesis says that a speculator with limited means cannot beat a particular index by a …

Reconstructing patterns of interconnections from partial information is one of the most important issues in the statistical physics of complex networks. A paramount example is provided by financial networks. In fact, the spreading and amplification of financial distress in capital markets is strongly affected by the in…

Study on MMV in jump-diffusion models resolves MV's non-monotonicity issues.

The paper proposes a new risk model for foundation models in finance.

We give a complete algorithm and source code for constructing general multifactor risk models (for equities) via any combination of style factors, principal components (betas) and/or industry factors. For short horizons we employ the Russian-doll risk model construction to obtain a nonsingular factor covariance matrix.…

The main objective is to present a some variant of the Black - Litterman model. We consider the canonical case when priori return is determined by means such excess return from the CAPM market portfolio which is derived using reverse optimization method. Then the a priori return is at risk quantified uncertainty. On th…

This paper formulates a model of utility for a continuous time framework that captures the decision-maker's concern with ambiguity about both volatility and drift. Corresponding extensions of some basic results in asset pricing theory are presented. First, we derive arbitrage-free pricing rules based on hedging argumen…

An open market is a subset of an entire equity market composed of a certain fixed number of top capitalization stocks. Though the number of stocks in the open market is fixed, the constituents of the market change over time as each company's rank by its market capitalization fluctuates. When one is allowed to invest al…

A motivating question in this paper is whether a sensible investment strategy may systematically contain long positions in out-of-the-money European calls with short expiry. Here we consider a very simple trading strategy for calls. The main points of this note are the following. First, the presented trading strategy a…

We introduce a new system of stochastic differential equations which models dependence of market beta and unsystematic risk upon size, measured by market capitalization. We fit our model using size deciles data from Kenneth French's data library. This model is somewhat similar to generalized volatility-stabilized model…

In this paper we present formulas for the valuation of debt and equity of firms in a financial network under comonotonic endowments. We demonstrate that the comonotonic setting provides a lower bound and Jensen's inequality provides an upper bound to the price of debt under Eisenberg-Noe financial networks with bankrup…

It is well established that in a market with inclusion of a risk-free asset the single-period mean-variance efficient frontier is a straight line tangent to the risky region, a fact that is the very foundation of the classical CAPM. In this paper, it is shown that in a continuous-time market where the risky prices are …

Research tackles investor confusion in ESG rankings, offering tailored strategies.

This article proposes a new method for the estimation of the parameters of a simple linear regression model which accounts for the role of co-moments in non-Gaussian distributions being based on the minimization of a quartic loss function. Although the proposed method is very general, we examine its application to fina…

We introduce a trade strategy representation theorem for performance measurement and portable alpha in high frequency trading, by embedding a robust trading algorithm that describe portfolio manager market timing behavior, in a canonical multifactor asset pricing model. First, we present a spectral test for market timi…

Solves equity premium puzzle with time-varying variables.

Machine learning improves beta forecasts, enhancing equity valuation and portfolio performance.

The study analyzes how wartime controls influenced zaibatsu stock prices in Japan.

Financial forecasting is challenging and attractive in machine learning. There are many classic solutions, as well as many deep learning based methods, proposed to deal with it yielding encouraging performance. Stock time series forecasting is the most representative problem in financial forecasting. Due to the strong …