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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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  1. Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2002. "Market Selection Of Financial Trading Strategies: Global Stability," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 329-339.
  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 Foellmi & Urs Meister, 2004. "Product-Market Competition in the Water Industry: Voluntary Nondiscriminatory Pricing," Working Papers 0032, University of Zurich, Institute for Strategy and Business Economics (ISU).
  2. Aleksander Berentsen & Guillaume Rocheteau, 2003. "Money and the Gains from Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 263-297, February.
  3. Igor Evstigneev & Dhruv Kapoor, 2006. "Arbitrage in stationary markets," The School of Economics Discussion Paper Series 0619, Economics, The University of Manchester.
  4. S D Flåm, 2005. "Portfolio Management without Probabilities or Statistics," The School of Economics Discussion Paper Series 0508, Economics, The University of Manchester.
  5. Stella, Fabio & Ventura, Alfonso, 2010. "Defensive online portfolio selection," MPRA Paper 33279, University Library of Munich, Germany.
  6. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 915-944, October.
  7. 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.
  8. Igor Evstigneev & Klaus Reiner Schenk-Hoppé, 2003. "Volatility-induced Growth in Financial Markets," Discussion Papers 03-40, University of Copenhagen. Department of Economics.

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