Diversified Portfolios in a Benchmark Framework
AbstractThis paper considers diversified portfolios in a benchmark framework. A new limit theorem for the approximation of the benchmark, which is the growth optimal portfolio, is obtained. In a diverse market it is shown that there exist approximations for the benchmark that are independent of model specifications. This leads to a robust modeling, calibration and risk management framework. For diversified portfolios with a large number of securities the limit theorem provides significant reductions in the complexity of quantitative applications as statistical inference and Value at Risk calculations.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 87.
Date of creation: 01 Jan 2003
Date of revision:
benchmark model; growth optimal portfolio; diversified portfolio; diverse market; tracking rate; value at risk;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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- David Heath & Eckhard Platen, 2003.
"Pricing of index options under a minimal market model with log-normal scaling,"
Taylor & Francis Journals, vol. 3(6), pages 442-450.
- David Heath & Eckhard Platen, 2003. "Pricing of Index Options Under a Minimal Market Model with Lognormal Scaling," Research Paper Series 101, Quantitative Finance Research Centre, University of Technology, Sydney.
- Eckhard Platen, 2003. "Modeling the Volatility and Expected Value of a Diversified World Index," Research Paper Series 103, Quantitative Finance Research Centre, University of Technology, Sydney.
- Eckhard Platen & Jason West, 2003. "Fair Pricing of Weather Derivatives," Research Paper Series 106, Quantitative Finance Research Centre, University of Technology, Sydney.
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