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Portfolio selection with exploration of new investment assets
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De Gennaro Aquino, Luca, Sornette, Didier and Strub, Moris S. (2023) Portfolio selection with exploration of new investment assets. European Journal of Operational Research, 310 (2). pp. 773-792. doi:10.1016/j.ejor.2023.03.017 ISSN 0377-2217.
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Official URL: http://doi.org/10.1016/j.ejor.2023.03.017
Abstract
We introduce a model for portfolio selection with an extendable investment universe where an agent with mean-variance preferences faces a trade-off between exploiting existing and exploring for new investment opportunities. When the agent chooses to explore, a new risky asset is discovered and the agent subsequently invests in the extended universe. We first provide conditions for wellposedness and characterize the optimal amount devoted to exploration. Our model shows that incremental exploration does not pay off, that it is increasingly worthwhile to explore in worse market environments, and that investment performance measured by the Sharpe ratio is increasing in the initial wealth of the agent indicating that richer agents can make better use of new investment opportunities. We further generalize our model and verify the robustness of the main findings with regard to various modeling assumptions.
Item Type: | Journal Article | ||||||||
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Divisions: | Faculty of Social Sciences > Warwick Business School | ||||||||
Journal or Publication Title: | European Journal of Operational Research | ||||||||
Publisher: | Elsevier | ||||||||
ISSN: | 0377-2217 | ||||||||
Official Date: | 16 October 2023 | ||||||||
Dates: |
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Volume: | 310 | ||||||||
Number: | 2 | ||||||||
Page Range: | pp. 773-792 | ||||||||
DOI: | 10.1016/j.ejor.2023.03.017 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access |
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