Modeling fundamental analysis into portfolio selection

Zhang, H.; Yan, C.

Abstract

We derive a closed-form appraisal/information ratio of the investors who are able to observe some information about security fundamentals, by solving a simple instantaneous mean-variance portfolio choice problem in a continuous-time framework. Both analytical and numerical results suggest that investors should choose securities with a more volatile mispricing, a less volatile fundamental, a higher mean-reverting speed and a larger dividend. Our model calibrated with realistic parameters easily outperforms top-percentile portfolio managers in reality, which suggests that the implementation of fundamental analysis may be impeded in practice due to limits of arbitrage. Our paper is a first, necessarily simple, step towards filling the gap of modelling fundamental analysis in portfolio selection.

Citation

Zhang, H., & Yan, C. (2018). Modeling fundamental analysis into portfolio selection. Quantitative Finance, 18(8), 1315-1326. https://doi.org/10.1080/14697688.2017.1418520

• Journal Article Type: Article
• Acceptance Date: Dec 13, 2017
• Online Publication Date: Feb 22, 2018
• Publication Date: Feb 22, 2018
• Deposit Date: Jan 2, 2018
• Publicly Available Date: Aug 22, 2019
• Journal: Quantitative Finance
• Print ISSN: 1469-7688
• Electronic ISSN: 1469-7696
• Publisher: Taylor and Francis Group
• Peer Reviewed: Peer Reviewed
• Volume: 18
• Issue: 8
• Pages: 1315-1326
• DOI: https://doi.org/10.1080/14697688.2017.1418520
• Public URL: https://durham-repository.worktribe.com/output/1369462