Orthant Probabilities for Robust Correlation and Structural Performance Enhancement

20 Pages Posted: 2 Sep 2015 Last revised: 8 Feb 2016

See all articles by Marty Anderson

Marty Anderson

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

Shan Chen

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

Jennifer Eichholz

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

Marc Lieberman

Kutak Rock, LLP

Mark Lundin

Charles Schwab Investment Management

Vaida Maleckaite

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

Ryan Parham

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Mark Steed

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

Date Written: September 1, 2015

Abstract

Orthant probabilities applied in a two-dimensional framework are used to derive quadrant-conditional financial asset return correlations which fully capture both linear and non-linear components of co-variability. We investigate the potential for employing quadrant-conditional correlations in order to construct portfolios which generate a long-run average portfolio return which is more positive than long-run averages of individual assets’ returns. Risk-based, but return-enhancing security selection applications involving assets co-variability criteria for investment management and high-frequency arbitrage trading are discussed.

Keywords: orthant, probability, portfolio, optimization, Sheppard's theorem, correlation, regime, risk

JEL Classification: C14, C15, C61, G11

Suggested Citation

Anderson, Marty and Chen, Shan and Eichholz, Jennifer and Lieberman, Marc and Lundin, Mark and Maleckaite, Vaida and Parham, Ryan and Satchell, Stephen E. and Steed, Mark, Orthant Probabilities for Robust Correlation and Structural Performance Enhancement (September 1, 2015). Available at SSRN: https://ssrn.com/abstract=2654394 or http://dx.doi.org/10.2139/ssrn.2654394

Marty Anderson

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

Shan Chen

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

Jennifer Eichholz

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

Marc Lieberman

Kutak Rock, LLP ( email )

Mark Lundin (Contact Author)

Charles Schwab Investment Management ( email )

9825 Schwab Way
Lone Tree, CO 80124
United States

HOME PAGE: http://www.schwab.com/

Vaida Maleckaite

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

Ryan Parham

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

Mark Steed

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

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