The Lucas (1978) Tree Model lies at the heart of modern macro-finance. At its core, it provides an analysis of the equilibrium price of a long-lived asset in an exchange economy where consumption is the objective, and the sole purpose of the asset is to smooth consumption through time....

Variable annuities contain complex guarantees, whose fair market value cannot be calculated in closed form. To value the guarantees, insurance companies rely heavily on Monte Carlo simulation, which is extremely computationally demanding for large portfolios of variable annuity policies....

We propose an information theoretic approach to measure price efficiency of financial assets and aggregate markets. Our measures draw on the idea of return predictability and are directly linked to the weak-form efficiency of the Efficient Market Hypothesis. Asness et. al. (2013) document strong...

For a weighted sum of asset returns that are independent and identically distributed (IID) up to variance, we derive expressions linking the distribution of variance across assets with higher-order portfolio moments, assuming these quantities are finite. In particular, we show concise...

In this article, we investigate the impact of truncating training data when fitting regression trees. We argue that training times can be curtailed by reducing the training sample without any loss in out-of-sample accuracy as long as the prediction model has been trained on the tails of the...

We introduce a new framework for understanding portfolio diversification that provides a coherent basis for comparing methodologies and offers a new approach to portfolio construction. The primary argument is that measures of diversification based only on a covariance matrix are ambiguous...

Statistical inferences for weights of the global minimum variance portfolio (GMVP) are of both theoretical and practical relevance for mean-variance portfolio selection. Daily realized GMVP weights depend only on realized covariance matrix computed from intraday highfrequency returns. In this...

Investors typically measure an asset’s potential to diversify a portfolio by its correlations with the portfolio’s other assets, but correlation is useful only if it provides a good estimate of how an asset’s returns co-occur cumulatively with the other asset returns over the investor’s...

We propose to impose a weighted L1 and squared L2 norm penalty on the portfolio weights to improve out-of-sample (OOS) performances of portfolio optimization when the number of assets becomes large. We show that under certain conditions, the realized risk of the optimal minimum variance...

A fast method based on coordinate-wise descent algorithms is developed to solve portfolio optimization problems in which asset weights are constrained by Lq norms for 1=q=2. The method is first applied to solve a minimum variance portfolio (mvp) optimization problem in which asset weights are...