Model‐free portfolio theory: A rough path approach

Allan, Andrew L.; Cuchiero, Christa; Liu, Chong; Prömel, David J.

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.

Citation

Allan, A. L., Cuchiero, C., Liu, C., & Prömel, D. J. (2023). Model‐free portfolio theory: A rough path approach. Mathematical Finance, 33(3), 709-765. https://doi.org/10.1111/mafi.12376

• Journal Article Type: Article
• Acceptance Date: Dec 21, 2022
• Online Publication Date: Jan 24, 2023
• Publication Date: 2023-07
• Deposit Date: Jan 24, 2023
• Publicly Available Date: Jun 30, 2023
• Journal: Mathematical Finance
• Print ISSN: 0960-1627
• Electronic ISSN: 1467-9965
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 33
• Issue: 3
• Pages: 709-765
• DOI: https://doi.org/10.1111/mafi.12376