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Generalized Lyapunov functions and functionally generated trading strategies

Author

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  • Ruf, Johannes
  • Xie, Kangjianan

Abstract

This paper investigates the dependence of functional portfolio generation, introduced by Fernholz (1999), on an extra finite variation process. The framework of Karatzas and Ruf (2017) is used to formulate conditions on trading strategies to be strong arbitrage relative to the market over sufficiently large time horizons. A mollification argument and Komlós theorem yield a general class of potential arbitrage strategies. These theoretical results are complemented by several empirical examples using data from the S&P 500 stocks.

Suggested Citation

  • Ruf, Johannes & Xie, Kangjianan, 2019. "Generalized Lyapunov functions and functionally generated trading strategies," LSE Research Online Documents on Economics 100023, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:100023
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    File URL: http://eprints.lse.ac.uk/100023/
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    More about this item

    Keywords

    additive generation; Lyapunov function; market diversity; multiplicative generation; portfolio analysis; portfolio generating function; regular function; S&P 500; Stochastic Portfolio Theory;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J1 - Labor and Demographic Economics - - Demographic Economics

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