An efficient ex-ante criterion for ranking investment strategies
Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review
Author(s)
Detail(s)
Original language | English |
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Pages (from-to) | 258-268 |
Journal / Publication | Applied Mathematics and Computation |
Volume | 210 |
Issue number | 1 |
Publication status | Published - 1 Apr 2009 |
Externally published | Yes |
Link(s)
Abstract
Fisher separation theorem [T.E. Copeland, J.F. Weston, K. Shastri, Financial Theory and Corporate Policy, fourth ed., Addison Wesley, New York, 2005] states that, in a perfect and complete capital market, the investment decisions of a firm are to maximize the wealth of its current shareholders regardless of their preferences. In this study, we integrate Dybvig's [P.H. Dybvig, Inefficient dynamic portfolio strategies or how to throw away a million dollars in the stock market, Review of Financial Studies 1 (1988) 67-88; P.H. Dybvig, Distributional analysis of portfolio choice, Journal of Business 61 (1988) 369-393] payoff distribution pricing model (PDPM) into the framework of this separation theorem and propose that an investment firm with numerous shareholders can use the inefficiency amount of the PDPM as a decision criterion for ranking ex-ante investment strategies in order of their value to the firm. For implementation, we formulate the PDPM in a multiperiod setting and develop an operational formula for computing the inefficiency amount of any strategy. Finally, using simulation, we compare four commonly used fixed-income strategies based on their inefficiency amounts. © 2009 Elsevier Inc. All rights reserved.
Research Area(s)
- Fisher separation theorem, Fixed-income strategies, Inefficiency amount, Payoff distribution pricing model, Two-factor Vasicek model
Citation Format(s)
An efficient ex-ante criterion for ranking investment strategies. / Kung, James J.; Carverhill, Andrew P.
In: Applied Mathematics and Computation, Vol. 210, No. 1, 01.04.2009, p. 258-268.Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review