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A Simple Procedure to Incorporate Predictive Models in Stochastic Investment Models

In: STOCK MARKET CRASHES Predictable and Unpredictable and What To Do About Them

Author

Listed:
  • William T. Ziemba
  • Sebastien Lleo
  • Mikhail Zhitlukhin

Abstract

Stochastic optimization has found a fertile ground for applications in finance. One of the greatest challenges remains to incorporate a set of scenarios that accurately models the behavior of financial markets, and in particular their behavior during crashes and crises, without sacrificing the tractability of the optimal investment policy. This chapter shows how to incorporate return predictions and crash predictions as views into continuous time asset allocation models.

Suggested Citation

  • William T. Ziemba & Sebastien Lleo & Mikhail Zhitlukhin, 2017. "A Simple Procedure to Incorporate Predictive Models in Stochastic Investment Models," World Scientific Book Chapters, in: STOCK MARKET CRASHES Predictable and Unpredictable and What To Do About Them, chapter 10, pages 235-245, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813223851_0010
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    More about this item

    Keywords

    Stock Market Crashes; Brexit; Trump; Financial Bubbles;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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