Portfolio symmetry and momentum

Portfolio symmetry and momentum

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Article ID: iaor20117334
Volume: 214
Issue: 3
Start Page Number: 759
End Page Number: 767
Publication Date: Nov 2011
Journal: European Journal of Operational Research
Authors: , ,
Keywords: portfolio analysis
Abstract:

This paper presents a novel theoretical framework to model the evolution of a dynamic portfolio (i.e., a portfolio whose weights vary over time), considering a given investment policy. The framework is based on graph theory and the quantum probability. Embedding the dynamics of a portfolio into a graph, each node of the graph representing a plausible portfolio, we provide the probabilities for a dynamic portfolio to lie on different nodes of the graph, characterizing its optimality in terms of returns. The framework embeds cross‐sectional phenomena, such as the momentum effect, in stochastic processes, using portfolios instead of individual stocks. We apply our methodology to an investment policy similar to the momentum strategy of . We find that the strategy symmetry is a source of momentum.

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