Portfolio Risk in Multiple Frequencies

IEEE Signal Processing Magazine, 2011

12 Pages Posted: 17 Jan 2012

See all articles by Ali Akansu

Ali Akansu

New Jersey Institute of Technology

Mustafa Torun

New Jersey Institute of Technology

Marco Avellaneda

New York University (NYU) - Courant Institute of Mathematical Sciences; Finance Concepts LLC

Date Written: September 1, 2011

Abstract

Portfolio risk, introduced by Markowitz in 1952, and defined as the standard deviation of the portfolio return, is an important metric in the Modern Portfolio Theory (MPT). A popular method for portfolio selection is to manage the risk and return of a portfolio according to the cross-correlations of returns for various financial assets. In a real world scenario, estimated empirical financial correlation matrix contains significant level of intrinsic noise that needs to be filtered prior to risk calculations. In this paper, we present basic concepts of risk engineering in finance applications. Then, we extend our discussion to the eigenfiltering of measurement noise for hedged portfolios. Moreover, we extend risk measurement methods for trading in multiple frequencies. Finally, three novel risk management methods are proposed as an independent overlay of the underlying investment decision mechanism, i.e. the trading strategy. We highlight performance and merit of the risk engineering techniques introduced by presenting the back-testing results of an investment strategy for the stocks listed in the NASDAQ 100 index. It is shown in the paper that managing portfolio risk more intelligently may offer advantages for improved return on investment.

Suggested Citation

Akansu, Ali and Torun, Mustafa and Avellaneda, Marco, Portfolio Risk in Multiple Frequencies (September 1, 2011). IEEE Signal Processing Magazine, 2011, Available at SSRN: https://ssrn.com/abstract=1986824

Ali Akansu (Contact Author)

New Jersey Institute of Technology ( email )

University Heights
Newark, NJ 07102
United States

Mustafa Torun

New Jersey Institute of Technology ( email )

University Heights
Newark, NJ 07102
United States

HOME PAGE: http://web.njit.edu/~umt2

Marco Avellaneda

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

251 Mercer Street
New York, NY 10012
United States
212-998-3129 (Phone)
212-995-4121 (Fax)

Finance Concepts LLC ( email )

590 Madison Avenue
21st Floor
New York, NY 10022
United States

HOME PAGE: http://www.finance-concepts.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
216
Abstract Views
1,203
rank
167,793
PlumX Metrics