arXiv · arXiv q-fin · 2022
We consider the problem of choosing a portfolio that maximizes the cumulative prospect theory (CPT) utility on an empirical distribution of asset returns. We show that while CPT utility is not a concave function of the portfolio weights, it can be expressed as a difference of two functions. The first term is the composition of a convex function with concave arguments and the second term a composition of a convex func…
Eric Luxenberg, Philipp Schiele, Stephen Boyd
arXiv · arXiv q-fin · 2019
A speculative agent with Prospect Theory preference chooses the optimal time to purchase and then to sell an indivisible risky asset to maximize the expected utility of the round-trip profit net of transaction costs. The optimization problem is formulated as a sequential optimal stopping problem and we provide a complete characterization of the solution. Depending on the preference and market parameters, the optimal …
Alex S. L. Tse, Harry Zheng
arXiv · arXiv q-fin · 2016
In this article, inspired by Shi, et al. we investigate the optimal portfolio selection with one risk-free asset and one risky asset in a multiple period setting under cumulative prospect theory (CPT). Compared with their study, our novelty is that we consider a stochastic benchmark, and portfolio constraints. We test the sensitivity of the optimal CPT-investment strategies to different model parameters by performing…
Liurui Deng, Traian A. Pirvu
arXiv · arXiv q-fin · 2014
Prospect theory is widely viewed as the best available descriptive model of how people evaluate risk in experimental settings. According to prospect theory, people are risk-averse with respect to gains and risk-seeking with respect to losses, a phenomenon called "loss aversion". Despite of the fact that prospect theory has been well developed in behavioral economics at the theoretical level, there exist very few larg…
Yang-Yu Liu, Jose C. Nacher, Tomoshiro Ochiai, Mauro Martino, Yaniv Altshuler
arXiv · arXiv q-fin · 2026
Reinforcement learning trading systems published in the academic literature overwhelmingly rely on price-aggregate state representations (OHLCV bars) or limit-order-book depth features, leaving microstructure pattern theories from the practitioner literature, namely Auction Market Theory and Market Profile, without a peer-reviewed computational instantiation. We present ViperQ, a reinforcement learning system whose s…
Asser Moustafa, Rares-Mihail Neagu, Jugal Kalita
arXiv · arXiv q-fin · 2014
Behavioral finance has become an increasingly important subfield of finance. However the main parts of behavioral finance, prospect theory included, understand financial markets through individual investment behavior. Behavioral finance thereby ignores any interaction between participants. We introduce a socio-financial model that studies the impact of communication on the pricing in financial markets. Considering th…
Jorgen Vitting Andersen, Ioannis Vrontos, Petros Dellaportas, Serge Galam
arXiv · arXiv q-fin · 2013
This paper examines an optimal investment problem in a continuous-time (essentially) complete financial market with a finite horizon. We deal with an investor who behaves consistently with principles of Cumulative Prospect Theory, and whose utility function on gains is bounded above. The well-posedness of the optimisation problem is trivial, and a necessary condition for the existence of an optimal trading strategy i…
Miklós Rásonyi, Andrea Meireles Rodrigues
arXiv · arXiv q-fin · 2007
This paper formulates and studies a general continuous-time behavioral portfolio selection model under Kahneman and Tversky's (cumulative) prospect theory, featuring S-shaped utility (value) functions and probability distortions. Unlike the conventional expected utility maximization model, such a behavioral model could be easily mis-formulated (a.k.a. ill-posed) if its different components do not coordinate well with…
Hanqing Jin, Xunyu Zhou
arXiv · arXiv · 2023
We focus on a behavioral model, that has been recently proposed in the literature, whose rational can be traced back to the Half-Full/Half-Empty glass metaphor. More precisely, we generalize the Half-Full/Half-Empty approach to the context of positive and negative lotteries and give financial and behavioral interpretations of the Half-Full/Half-Empty parameters. We develop a portfolio selection model based on the Hal…
Francesco Cesarone, Massimiliano Corradini, Lorenzo Lampariello, Jessica Riccioni
arXiv · arXiv · 2014
Many investment models in discrete or continuous-time settings boil down to maximizing an objective of the quantile function of the decision variable. This quantile optimization problem is known as the quantile formulation of the original investment problem. Under certain monotonicity assumptions, several schemes to solve such quantile optimization problems have been proposed in the literature. In this paper, we prop…
Zuo Quan Xu
arXiv · arXiv · 2020
Although the CML (Capital Market Line), the Intertemporal-CAPM, the CAPM/SML (Security Market Line) and the Intertemporal Arbitrage Pricing Theory (IAPT) are widely used in portfolio management, valuation and capital markets financing; these theories are inaccurate and can adversely affect risk management and portfolio management processes. This article introduces several empirically testable financial theories that …
Michael Nwogugu
OpenAlex · 1995 · cites 1349
Foreword. 1. Markets and Market--Making. 2. Inventory Models. 3. Information--Based Models. 4. Strategic Trader Models I: Informed Traders. 5. Strategic Trader Models II: Uninformed Traders. 6. Information and the Price Process. 7. Market Viability and Stability. 8. Liquidity and the Relationships between Markets. 9. Issues in Market Performance.
Maureen O’Hara
arXiv · arXiv · 2026
We propose a microstructural model for the order flow in financial markets that distinguishes between {\it core orders} and {\it reaction flow}, both modeled as Hawkes processes. This model has a natural scaling limit that reconciles a number of salient empirical properties: persistent signed order flow, rough trading volume and volatility, and power-law market impact. In our framework, all these quantities are pinne…
Johannes Muhle-Karbe, Youssef Ouazzani Chahdi, Mathieu Rosenbaum, Grégoire Szymanski
arXiv · arXiv · 2025
Although the valuation of life contingent assets has been thoroughly investigated under the framework of mathematical statistics, little financial economics research pays attention to the pricing of these assets in a non-arbitrage, complete market. In this paper, we first revisit the Fundamental Theorem of Asset Pricing (FTAP) and the short proof of it. Then we point out that discounted asset price is a martingale on…
Patrick Ling
arXiv · arXiv · 2025
An automated market maker (AMM) provides a method for creating a decentralized exchange on the blockchain. For this purpose, individual investors lend liquidity to the AMM pool in exchange for a stream of fees earned from its operations as a market maker. Within this work, we reinterpret the loss-versus-rebalancing as the implied fee stream generated by an AMM so that a risk-neutral investor is indifferent in the dec…
Maxim Bichuch, Zachary Feinstein
arXiv · arXiv · 2025
We investigate the application of quantum cognition machine learning (QCML), a novel paradigm for both supervised and unsupervised learning tasks rooted in the mathematical formalism of quantum theory, to distance metric learning in corporate bond markets. Compared to equities, corporate bonds are relatively illiquid and both trade and quote data in these securities are relatively sparse. Thus, a measure of distance/…
Joshua Rosaler, Luca Candelori, Vahagn Kirakosyan, Kharen Musaelian, Ryan Samson
arXiv · arXiv · 2024
The Capital Asset Pricing Model (CAPM) relates a well-diversified stock portfolio to a benchmark portfolio. We insert size effect in the CAPM, capturing the observation that small stocks have higher risk and return than large stocks, on average. Our goal is to make the resulting linear regressions have independent identically distributed Gaussian residuals. In some cases, we find that including the Volatility Index a…
Abraham Atsiwo, Andrey Sarantsev
arXiv · arXiv · 2024
This research investigates liquidity dynamics in fractional ownership markets, focusing on illiquid alternative investments traded on a FinTech platform. By leveraging empirical data and employing agent-based modeling (ABM), the study simulates trading behaviors in sell offer-driven systems, providing a foundation for generating insights into how different market structures influence liquidity. The ABM-based simulati…
Lars Fluri, A. Ege Yilmaz, Denis Bieri, Thomas Ankenbrand, Aurelio Perucca