The premium of dynamic trading
It is well established that, in a market with inclusion of a risk-free asset, the single-period mean-variance efficient frontier is a straight line tangent to the risky region, a fact that is the very foundation of the classical CAPM. In this paper, it is shown that, in a continuous-time market wher...
| Main Authors: | , |
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| 格式: | Journal article |
| 語言: | English |
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2011
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| _version_ | 1826272093349609472 |
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| author | Chiu, C Zhou, X |
| author_facet | Chiu, C Zhou, X |
| author_sort | Chiu, C |
| collection | OXFORD |
| description | It is well established that, in a market with inclusion of a risk-free asset, the single-period mean-variance efficient frontier is a straight line tangent to the risky region, a fact that is the very foundation of the classical CAPM. In this paper, it is shown that, in a continuous-time market where the risky prices are described by Itô processes and the investment opportunity set is deterministic (albeit time-varying), any efficient portfolio must involve allocation to the risk-free asset at any time. As a result, the dynamic mean-variance efficient frontier, although still a straight line, is strictly above the entire risky region. This in turn suggests a positive premium, in terms of the Sharpe ratio of the efficient frontier, arising from dynamic trading. Another implication is that the inclusion of a risk-free asset boosts the Sharpe ratio of the efficient frontier, which again contrasts sharply with the single-period case. © 2011 Taylor and Francis. |
| first_indexed | 2024-03-06T22:07:06Z |
| format | Journal article |
| id | oxford-uuid:5087d02c-d23c-4850-894a-f739effdedef |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-06T22:07:06Z |
| publishDate | 2011 |
| record_format | dspace |
| spelling | oxford-uuid:5087d02c-d23c-4850-894a-f739effdedef2022-03-26T16:14:07ZThe premium of dynamic tradingJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:5087d02c-d23c-4850-894a-f739effdedefEnglishSymplectic Elements at Oxford2011Chiu, CZhou, XIt is well established that, in a market with inclusion of a risk-free asset, the single-period mean-variance efficient frontier is a straight line tangent to the risky region, a fact that is the very foundation of the classical CAPM. In this paper, it is shown that, in a continuous-time market where the risky prices are described by Itô processes and the investment opportunity set is deterministic (albeit time-varying), any efficient portfolio must involve allocation to the risk-free asset at any time. As a result, the dynamic mean-variance efficient frontier, although still a straight line, is strictly above the entire risky region. This in turn suggests a positive premium, in terms of the Sharpe ratio of the efficient frontier, arising from dynamic trading. Another implication is that the inclusion of a risk-free asset boosts the Sharpe ratio of the efficient frontier, which again contrasts sharply with the single-period case. © 2011 Taylor and Francis. |
| spellingShingle | Chiu, C Zhou, X The premium of dynamic trading |
| title | The premium of dynamic trading |
| title_full | The premium of dynamic trading |
| title_fullStr | The premium of dynamic trading |
| title_full_unstemmed | The premium of dynamic trading |
| title_short | The premium of dynamic trading |
| title_sort | premium of dynamic trading |
| work_keys_str_mv | AT chiuc thepremiumofdynamictrading AT zhoux thepremiumofdynamictrading AT chiuc premiumofdynamictrading AT zhoux premiumofdynamictrading |