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Portfolio Symmetry and Momentum


Author Info

  • Monica Billio

    (Dipartimento di Scienze Economiche - Università Ca' Foscari di Venezia)

  • Ludovic Calès

    (Dipartimento di Scienze Economiche - Università Ca' Foscari di Venezia et Centre d'Economie de la Sorbonne)

  • Dominique Guegan

    (Centre d'Economie de la Sorbonne - Paris School of Economics)


This paper presents a theorical framework to model the evolution of a portfolio whose weights vary over time. Such a portfolio is called a dynamic portfolio. In a first step, considering a given investment policy, we define the set of the investable portfolios. Then, considering portfolio vicinity in terms of turnover, we represent the investment policy as a graph. It permits us to model the evolution of a dynamic portfolio as a stochastic process in the set of the investable portfolios. Our first model for the evolution of a dynamic portfolio is a random walk on the graph corresponding to the investment policy chosen. Next, using graph theory and quantum probability, we compute the probabilities for a dynamic portfolio to be in the different regions of the graph. The resulting distribution is called spectral distribution. It depends on the geometrical properties of the graph and thus in those of the investment policy. The framework is next applied to an investment policy similar to the Jeegadeesh and Titman's momentum strategy [JT1993]. We define the optimal dynamic portfolio as the sequence of portfolios, from the set of the investable portfolios, which gives the best returns over a respective sequence of time periods. Under the assumption that the optimal dynamic portfolio follows a random walk, we can compute its spectral distribution. We found then that the strategy symmetry is a source of momentum.

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Bibliographic Info

Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 09003.

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Length: 23 pages
Date of creation: Feb 2009
Date of revision: Nov 2009
Handle: RePEc:mse:cesdoc:09003

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Keywords: Graph theory; momentum; dynamic portfolio; quantum probability; spectral analysis.;

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  1. Okunev, John & White, Derek, 2003. "Do Momentum-Based Strategies Still Work in Foreign Currency Markets?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(02), pages 425-447, June.
  2. K. Rouwenhorst, 1996. "International Momentum Strategies," Yale School of Management Working Papers, Yale School of Management ysm36, Yale School of Management, revised 01 Feb 2008.
  3. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, American Finance Association, vol. 48(1), pages 65-91, March.
  4. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, Elsevier, vol. 49(3), pages 307-343, September.
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Cited by:
  1. Timo H. Leivo, 2012. "Combining value and momentum indicators in varying stock market conditions: The Finnish evidence," Review of Accounting and Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 11(4), pages 400-447.
  2. Monica Billio & Ludovic Calès & Dominique Guegan, 2012. "Cross-Sectional Analysis through Rank-based Dynamic Portfolios," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00707430, HAL.
  3. repec:hal:journl:halshs-00707430 is not listed on IDEAS
  4. Pätäri, Eero & Leivo, Timo & Honkapuro, Samuli, 2012. "Enhancement of equity portfolio performance using data envelopment analysis," European Journal of Operational Research, Elsevier, Elsevier, vol. 220(3), pages 786-797.
  5. Monica Billio & Ludovic Calès & Dominique Guegan, 2012. "Cross-Sectional Analysis through Rank-based Dynamic," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 12036, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.


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