Nonlinear price dynamics of ETFs and support for the Constant Rebalanced Portfolio strategy

Wednesday, March 25, 2015 - 14:00 to 15:00
703 Thackeray Hall
Speaker Information
Mark DeSantis
Chapman University

Abstract or Additional Information

Abstract: Prior empirical and experimental studies have demonstrated the applicability of the multi-group asset flow model (developed and refined by Caginalp and collaborators since 1990) to real world markets.  I will present two works related to this model.  From an empirical perspective I consider the price dynamics of large market-capitalization U.S. equity exchange-traded funds (ETFs).  The existence of a cubic nonlinearity in the price trend suggests that traders are not only aware of the underreaction of others, but also self-optimize by anticipating others’ reactions.  From a theoretical perspective the model is used to evaluate the performance of various investment strategies by comparing their effect on the wealth of investor group(s). In particular, the constant rebalanced portfolio strategy minimizes investment risks because it maintains the investor's wealth after any cycle in which price returns to its starting value, while any other strategy can be exploited by other investors in the market and result in a loss of wealth.