Search arXivSearch

arXiv · 2202.02488

Efficient frontiers for portfolios under SSD and law-invariant risk measures with hyperbolic return distributions

Abstract

In the classical Markowitz mean variance framework, risk is measured by variance, and the portfolios on the efficient frontier can be derived in closed form using standard optimization methods. For broader mean risk formulations, however, obtaining closed form optimal portfolios is typically difficult. In this work, we derive explicit expressions for frontier portfolios corresponding to arbitrary law-invariant convex risk measures, assuming that the return vector follows a normal mean variance mixture distribution. Our approach first establishes stochastic dominance relations within the family of normal mean variance mixture models, and then leverages these relations to derive closed-form representations of frontier portfolios. The central finding demonstrates that when asset returns are described by a normal mean variance mixture models the associated mean risk efficient frontier can be obtained by solving a Markowitz mean variance problem for a suitably transformed return vector. The paper also extends the CAPM framework to the context of a normal mean variance mixture distribution.

Explore related subjects

Keep this discovery

Explore connections, maps & timelines

BibTeXRIS

Hasanjan Sayit. 2026-08-16. Efficient frontiers for portfolios under SSD and law-invariant risk measures with hyperbolic return distributions. https://arxiv.org/abs/2202.02488

Cite the original work for its findings. Save a collection to share your selection of sources.

KEEP EXPLORING

Related papers

Efficient simulation of a new class of Volterra-type SDEs

We propose a new theoretical framework that exploits convolution kernels to transform a Volterra-type path-dependent (non-Markovian) stochastic process into a standard (Markovian) diffusion process. The transformation is reversible. We discuss existence and path-wise regularity of solutions for our class of stochastic differential equations. In the fractional-kernel case, when $H\in(0,\frac12)$, where $H$ is the Hurst coefficient, we propose a numerical simulation scheme which exhibits a strong convergence rate of order $1/2$, improving upon the rate typically obtained by Euler schemes for stochastic Volterra equations with comparably rough trajectories. This improvement is made possible by the distinctive structure of the proposed class, characterized by a non-Markovian process whose coefficients are driven by an associated Markovian one.

q-fin.MF

The skew Brownian motion should not be used as a risk-neutral returns process: a well-posed skew-normal alternative

Return models for risk-neutral financial valuation based on skew Brownian motions (SBMs) have been introduced about twenty years ago, and have recently enjoying growing popularity. Unfortunately, the story behind their development is one of mistakes and erroneous interpretations, beginning from the foundational misrepresentations that the prevalent financial model is based on the Itô-McKean SBM -- which, in fact, it is not. Besides, and more seriously, the clarification of \cite{rossello2012arbitrage} that price models with a local time in their returns, such as the SBM, are arbitrageable has been, by and large, ignored. In this paper, we try to clear the field from the confusions and misconceptions lurking in the standing option pricing literature on SBM, by exposing all the errors we could trace in the treatment so far. Recognizing however the potential of the SBM skew-normal marginals for risk-neutral valuation, as a positive contribution, we reformulate the putative SBM call pricing formula and show that, even if the SBM return model admits arbitrage, its option pricing formula does not. The correct Markovian SDE with skew-normal marginals is then identified, its strong well-posedness shown, and by exploiting the availability of closed formulae, an asymptotic analysis of the implied volatility surface is offered. En route to our conclusions, we obtain a novel normal/skew-normal stochastic dominance property of independent interest.

q-fin.MF