Invited Session Wed.3.H 3027

Wednesday, 15:15 - 16:45 h, Room: H 3027

Cluster 7: Finance & economics [...]

Management of portfolios and liabilities


Chair: Dan Andrei Iancu and Nikos Trichakis



Wednesday, 15:15 - 15:40 h, Room: H 3027, Talk 1

Alberto Martín-Utrera
Size matters: Calibrating shrinkage estimators for portfolio optimization

Coauthors: Victor Demiguel, Francisco J. Nogales


We provide a comprehensive study of shrinkage estimators for portfolio selection. We study both portfolios computed from shrinkage estimators of the moments of asset returns (including new shrinkage estimators of the mean and the inverse covariance matrix), as well as shrinkage portfolios obtained by shrinking the portfolio weights directly. We propose two calibration approaches to determine the shrinkage intensity: a parametric approach based on the assumption that returns are independent and identically distributed as a normal (that leads to closed-form expressions for the shrinkage intensity), and a nonparametric approach that makes no assumptions on the return distribution. We carry out extensive empirical tests across six real datasets.



Wednesday, 15:45 - 16:10 h, Room: H 3027, Talk 2

Nikos Trichakis
Fairness in multi-portfolio optimization

Coauthor: Dan A. Iancu


We deal with the problem faced by a portfolio manager in charge of multiple accounts. In such a setting, the performance of each individual account typically depends on the trading strategy of other accounts as well, due to market impact cost of the aggregate trading activity. We propose a novel, tractable approach for jointly optimizing the trading activities of all accounts and also splitting the associated market impact costs between the accounts. Our approach allows the manager to balance the conflicting objectives of maximizing the aggregate gains from joint optimization and distributing them across the accounts in an equitable way. We perform numerical studies that suggest that our approach outperforms existing methods employed in the industry or discussed in the literature.



Wednesday, 16:15 - 16:40 h, Room: H 3027, Talk 3

Pedro Júdice
Long-term bank balance sheet management: Estimation and simulation of risk-factors

Coauthors: Birge R. John, Júdice Pedro


We propose a dynamic framework which encompasses the main risks in balance sheets of banks in an integrated fashion. Our contributions are fourfold: 1) solving a simple one-period model that describes the optimal bank policy under credit risk; 2) estimating the long-term stochastic processes underlying the risk factors in the balance sheet, taking into account the credit and interest rate cycles; 3) simulating several scenarios for interest rates and charge-offs; and 4) describing the equations that govern the evolution of the balance sheet in the long run. The models that we use address momentum and the interaction between different rates. Our results enable simulation of bank balance sheets over time given a bank's lending strategy and provides a basis for an optimization model to determine bank asset-liability management strategy endogenously.


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