Details
| Original language | English |
|---|---|
| Pages (from-to) | 715-728 |
| Number of pages | 14 |
| Journal | Operations Research |
| Volume | 70 |
| Issue number | 2 |
| Early online date | 17 Dec 2021 |
| Publication status | Published - Mar 2022 |
Abstract
We study the ex ante minimization of market inefficiency, defined in terms of minimum deviation of market prices from fundamental values, from a centralized planner’s perspective. Prices are pressured from exogenous trading actions of leverage-targeting banks, which rebalance their portfolios in response to asset shocks. We characterize market inefficiency in terms of two key drivers, the banks’ systemic significance and the statistical moments of asset shocks, and develop an explicit expression for the matrix of asset holdings that minimizes such inefficiency. Our analysis shows that to reduce inefficiencies, portfolio holdings should deviate more from a full diversification strategy if there is little heterogeneity in banks’ systemic significance.
Keywords
- leverage targeting, market efficiency, price pressure, systemic economy, systemic significance
ASJC Scopus subject areas
- Computer Science(all)
- Computer Science Applications
- Decision Sciences(all)
- Management Science and Operations Research
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In: Operations Research, Vol. 70, No. 2, 03.2022, p. 715-728.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Market Efficient Portfolios in a Systemic Economy
AU - Awiszus, Kerstin
AU - Capponi, Agostino
AU - Weber, Stefan
N1 - Funding Information: Funding: The research of A. Capponi has been supported by NSF-CMMI [CAREER Grant 1752326]. Supplemental Material: The e-companion is available at https://doi.org/10.1287/opre.2021.2172.
PY - 2022/3
Y1 - 2022/3
N2 - We study the ex ante minimization of market inefficiency, defined in terms of minimum deviation of market prices from fundamental values, from a centralized planner’s perspective. Prices are pressured from exogenous trading actions of leverage-targeting banks, which rebalance their portfolios in response to asset shocks. We characterize market inefficiency in terms of two key drivers, the banks’ systemic significance and the statistical moments of asset shocks, and develop an explicit expression for the matrix of asset holdings that minimizes such inefficiency. Our analysis shows that to reduce inefficiencies, portfolio holdings should deviate more from a full diversification strategy if there is little heterogeneity in banks’ systemic significance.
AB - We study the ex ante minimization of market inefficiency, defined in terms of minimum deviation of market prices from fundamental values, from a centralized planner’s perspective. Prices are pressured from exogenous trading actions of leverage-targeting banks, which rebalance their portfolios in response to asset shocks. We characterize market inefficiency in terms of two key drivers, the banks’ systemic significance and the statistical moments of asset shocks, and develop an explicit expression for the matrix of asset holdings that minimizes such inefficiency. Our analysis shows that to reduce inefficiencies, portfolio holdings should deviate more from a full diversification strategy if there is little heterogeneity in banks’ systemic significance.
KW - leverage targeting
KW - market efficiency
KW - price pressure
KW - systemic economy
KW - systemic significance
UR - http://www.scopus.com/inward/record.url?scp=85134364020&partnerID=8YFLogxK
U2 - 10.1287/opre.2021.2172
DO - 10.1287/opre.2021.2172
M3 - Article
VL - 70
SP - 715
EP - 728
JO - Operations Research
JF - Operations Research
SN - 0030-364X
IS - 2
ER -