Andrs Urbn

Mihly Ormos PhD.

GROWTH OPTIMAL INVESTMENTS WITH TRANSACTION COSTS

Opatija 2010

A. Urbn M. Ormos

Overview
Investment Strategies
Classical approach Growth Optimal approach

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Growth Optimal Investment

Theory Practise

Empirical Results
CAPM, Factor models Growth Optimal strategy

Opatija 2010

A. Urbn M. Ormos

The Growth Optimal Policy A logoptimlis stratgia

Naive Markowitz, Sharpe, Treynor- Black Growth Optimal
Expected return Heuirstic methods Mean return - variance A, Mean log-return Xi

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Opatija 2010

A. Urbn M. Ormos

Price relatives

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Pl.:
d. Asset d rszvny

xi(d)

101%

Asset 1 1. rszvny

xi(1)
g-3 g-2 g-1 g i+1 i+2 i+3 i+4
g-4

100,6%

i-1

...

i+5

nap day

Opatija 2010

A. Urbn M. Ormos

The Growth Optimal Policy A logoptimlis stratgia

Naive Markowitz, Sharpe, Treynor- Black Growth Optimal
Maximizing wealth level:
Expected return Heuirstic methods Mean return - variance A, Mean log-return Xi

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WT = xT xT 1 ... x1 W0
WT = W0 xt = W0 e t =1
t =1 T

ln xt

= W0 e

TGT

1 T GT = ln xt . T t =1

Opatija 2010

A. Urbn M. Ormos

Estimation of Future Returns A logoptimlis stratgia

Naive Markowitz, Sharpe, Treynor- Black Growth Optimal
Expected return Heuirstic methods Mean return - variance A, Mean log-return Xi

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Estiamtion of expected return and risk:

Unconditional probability denstity function of return Expected return ~ mean of historical returns Expected risk ~ historical standard deviation
Conditional estimation future returns Estimation of next day returns based on previous observations

Opatija 2010

A. Urbn M. Ormos

Estimation of Future Returns

Xn empirikus Estimation for xT becslsei
d. Asset d rszvny

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xT Xn elzmnye 1

1. rszvny Asset 1

g-4

g-3

g-2

g-1

n-6

n-5

n-4

n-3

n-2

n-1

...

day nap

Opatija 2010

A. Urbn M. Zoltn Urbn Andrs Ormos Tams

Estimation of Future Returns

7/10

Robustness

0% 3% 6% 9% 12% 15% 18% 21% 24% 27% 30% 33% 36% 39% 42% 45% 48% 51% 54% 57% 60% 63% 66% 69% 72% 75% 78% 81% 84% 87% 90% 93% 96% 99%

Accuracy

Applied matchings (%)

The proper ratio of matchings is not know previously.
Accurarcy Robustness

$
$

$
$

Aggregation of agents wealth

Opatija 2010 A. Urbn M. Ormos

Transaction Costs

8/10

Proportional transaction costs

Initial stock

Reduced stock

tc =reduced stock / initial stock

Opatija 2010

A. Urbn M. Ormos

Methodology
Assets Interval Risk-free rate Market index Source of data Transaction cost
Dow Jones Industrial Average constituents in December 2005. January 1991 December 2005 US Treasury Bill 1 month NYSE, AMEX and NASDAQ capitalization weighted average, including dividends Center for Research in Security Prices (CRSP) database

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0.1%
Factor models
R2, adjusted R2 and t-stats

Equilibrium models Model evaluation

Opatija 2010

A. Urbn M. Ormos

Empirikus eredmnyek Faktor modellek

SMB HML

10/10 MOM
mom
-0.09
(-1.37) 0.172

Three-factor model R2
F-stat p-value adj. R2 0.663 76.24 0.000 0.654 Estimated coeff. (t-stat) p-value

alfa
1.04 (2.73) 0.007

beta
1.01 (11.75) 0.000

smb
-0.33 (-3.41) 0.001

hml
-0.24 (-1.89) 0.061

Four-factor model

R2
F-stat p-value adj. R2

0.668
58.09 0.000 0.657

Estimated coeff.
(t-stat) p-value

1.14
(2.96) 0.003

1.06
(10.86) 0.000

-0.31
(-3.18) 0.002

-0.26
(-2.06) 0.042

Growth-optimal
Avg. monthly prem. 1.99% Std. dev. 11.44%

Opatija 2010

A. Urbn M. Ormos

Thank you for your attention!

Opatija 2010

A. Urbn M. Ormos