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From Rags to Riches: On Constant Proportions Investment Strategies

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  • Igor V. Evstigneev
  • Klaus Rainer Schenk-Hoppé

Abstract

This paper studies the performance of self-financing constant proportions trading strategies, i.e. dynamic asset allocation strategies that keep a fixed constant proportion of wealth invested in each asset in all periods in time. We prove that any self-financing constant proportions strategy yields a strictly positive exponential rate of growth of investor's wealth in a financial market in which prices are described by stationary stochastic processes and the price ratios are non-degenerate. This result might be regarded as being counterintuitive because any such strategy yields no increase of wealth under constant prices. We further show that the result also holds under small transaction costs, which is important for the viability of this approach, since constant proportions strategies require frequent rebalancing of the portfolio.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 089.

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Handle: RePEc:zur:iewwpx:089

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Keywords: financial markets; constant-proportions investment strategies; balanced growth portfolios; self-financing strategies;

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References

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  1. Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, . "Market Selection of Financial Trading Strategies: Global Stability," IEW - Working Papers 083, Institute for Empirical Research in Economics - University of Zurich.
  2. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
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Cited by:
  1. Reto Föllmi & Urs Meister, . "Product-Market Competition in the Water Industry: Voluntarily Nondiscriminatory Pricing," IEW - Working Papers 115, Institute for Empirical Research in Economics - University of Zurich.
  2. Sjur Flåm, 2010. "Portfolio management without probabilities or statistics," Annals of Finance, Springer, vol. 6(3), pages 357-368, July.
  3. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 915-944.
  4. Igor Evstigneev & Dhruv Kapoor, 2006. "Arbitrage in stationary markets," The School of Economics Discussion Paper Series 0619, Economics, The University of Manchester.
  5. Aleksander Berentsen & Guillaume Rocheteau, . "Money and the Gains from Trade," IEW - Working Papers 100, Institute for Empirical Research in Economics - University of Zurich.
  6. Fabio Stella & Alfonso Ventura, 2011. "Defensive online portfolio selection," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 2(1/2), pages 88-105.
  7. Igor Evstigneev & Klaus Reiner Schenk-Hoppé, 2003. "Volatility-induced Growth in Financial Markets," Discussion Papers 03-40, University of Copenhagen. Department of Economics.
  8. Berentsen, Aleksander & Rocheteau, Guillaume, 2002. "On the efficiency of monetary exchange: how divisibility of money matters," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1621-1649, November.

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