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Leakage of rank-dependent functionally generated trading strategies

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  • Kangjianan Xie

Abstract

This paper investigates the so-called leakage effect of trading strategies generated functionally from rank-dependent portfolio generating functions. This effect measures the loss in wealth of trading strategies due to renewing the portfolio constituent stocks. Theoretically, the leakage effect of a trading strategy is expressed explicitly by a finite-variation term. The computation of the leakage is different from what previous research has suggested. The method to estimate leakage in discrete time is then introduced with some practical considerations. An empirical example illustrates the leakage of the corresponding trading strategies under different constituent list sizes.

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  • Kangjianan Xie, 2019. "Leakage of rank-dependent functionally generated trading strategies," Papers 1912.04221, arXiv.org.
    • Handle: RePEc:arx:papers:1912.04221
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    References listed on IDEAS

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    1. Banner, Adrian D. & Ghomrasni, Raouf, 2008. "Local times of ranked continuous semimartingales," Stochastic Processes and their Applications, Elsevier, vol. 118(7), pages 1244-1253, July.
    2. Robert Fernholz, 2001. "Equity portfolios generated by functions of ranked market weights," Finance and Stochastics, Springer, vol. 5(4), pages 469-486.
    3. Robert Fernholz, 1999. "Portfolio Generating Functions," World Scientific Book Chapters, in: Marco Avellaneda (ed.), Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar, chapter 15, pages 344-367, World Scientific Publishing Co. Pte. Ltd..
    4. Adrian Banner & Robert Fernholz & Vassilios Papathanakos & Johannes Ruf & David Schofield, 2018. "Diversification, Volatility, and Surprising Alpha," Papers 1809.03769, arXiv.org.
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