On Stochastic and Worst-case Models for Investing
published: Jan. 19, 2010, recorded: December 2009, views: 3548
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In practice, most investing is done assuming a probabilistic model of stock price returns known as the Geometric Brownian Motion (GBM). While it is often an acceptable approximation, the GBM model is not always valid empirically. This motivates a worst-case approach to investing, called universal portfolio management, where the objective is to maximize wealth relative to the wealth earned by the best fixed portfolio in hindsight. In this paper we tie the two approaches, and design an investment strategy which is universal in the worst-case, and yet capable of exploiting the mostly valid GBM model. Our method is based on new and improved regret bounds for online convex optimization with exp-concave loss functions.
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