IDEAS home Printed from https://ideas.repec.org/a/inm/oropre/v70y2022i2p715-728.html
   My bibliography  Save this article

Market Efficient Portfolios in a Systemic Economy

Author

Listed:
  • Kerstin Awiszus

    (Institute of Actuarial and Financial Mathematics & House of Insurance, Leibniz Universität Hannover, D-30167 Hannover, Germany)

  • Agostino Capponi

    (Department of Industrial Engineering and Operations Research, Columbia University, New York 10027)

  • Stefan Weber

    (Institute of Actuarial and Financial Mathematics & House of Insurance, Leibniz Universität Hannover, D-30167 Hannover, Germany)

Abstract

We study the ex ante minimization of market inefficiency, defined in terms of minimum deviation of market prices from fundamental values, from a centralized planner’s perspective. Prices are pressured from exogenous trading actions of leverage-targeting banks, which rebalance their portfolios in response to asset shocks. We characterize market inefficiency in terms of two key drivers, the banks’ systemic significance and the statistical moments of asset shocks, and develop an explicit expression for the matrix of asset holdings that minimizes such inefficiency. Our analysis shows that to reduce inefficiencies, portfolio holdings should deviate more from a full diversification strategy if there is little heterogeneity in banks’ systemic significance.

Suggested Citation

  • Kerstin Awiszus & Agostino Capponi & Stefan Weber, 2022. "Market Efficient Portfolios in a Systemic Economy," Operations Research, INFORMS, vol. 70(2), pages 715-728, March.
    • Handle: RePEc:inm:oropre:v:70:y:2022:i:2:p:715-728
    DOI: 10.1287/opre.2021.2172
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/opre.2021.2172
    Download Restriction: no
    File URL: https://libkey.io/10.1287/opre.2021.2172?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:oropre:v:70:y:2022:i:2:p:715-728. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.