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Model-free portfolio theory: A rough path approach
Authors:Andrew L. Allan  Christa Cuchiero  Chong Liu  David J. Prömel
Affiliation:1. Durham University, Durham, UK;2. University of Vienna, Vienna, Austria;3. ShanghaiTech University, Shanghai, China;4. University of Mannheim, Mannheim, Germany
Abstract:Based on a rough path foundation, we develop a model-free approach to stochastic portfolio theory (SPT). Our approach allows to handle significantly more general portfolios compared to previous model-free approaches based on Föllmer integration. Without the assumption of any underlying probabilistic model, we prove a pathwise formula for the relative wealth process, which reduces in the special case of functionally generated portfolios to a pathwise version of the so-called master formula of classical SPT. We show that the appropriately scaled asymptotic growth rate of a far reaching generalization of Cover's universal portfolio based on controlled paths coincides with that of the best retrospectively chosen portfolio within this class. We provide several novel results concerning rough integration, and highlight the advantages of the rough path approach by showing that (nonfunctionally generated) log-optimal portfolios in an ergodic Itô diffusion setting have the same asymptotic growth rate as Cover's universal portfolio and the best retrospectively chosen one.
Keywords:Cover's universal portfolio  log-optimal portfolio  model uncertainty  pathwise integration  rough path  stochastic portfolio theory
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