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Prof. Chanaka Edirisinghe:Leveraged Portfolio Selection under Liquidity Risk: Model,Theory and Computation

Publish Date: 2018/07/10 10:56:25    Hits:

On9thJuly, 2018, we welcome Prof.Chanaka Edirisinghe to ourseries lecture on “Economics and Business”, as well as his speech on Leveraged Portfolio Selection under Liquidity Risk: Model, Theory and Computation. Prof. Chanaka Edirisinghe is the Kay and Jackson Tai ’72 Chair, Professor of Quantitative Finance and Director of the Center for Financial Studies in Lally School of Management of Rensselaer Polytechnic Institute. He is mainly engaged in the research on quantitative finance topics, as well as stochastic and quadratic optimization.The lecture was hosted by Associate Prof. Jingnan Chen from School of Economicsand Management at Beihang University. 

In the following lecture, Prof. Chanaka Edirisinghe has presented that when a financial portfolio is rebalanced under market conditionsto satisfy leverage and other restrictions, asset illiquidity adversely-impactstrading prices, and hence, the portfolio's performance. Using a continuous-timetrading model, we study the Pareto-efficiency between risk-adjusted return, leverage,and target return. We show analytically that the Sharpe-maximizing unlevered portfolio is no longer a tangency portfolio, and proportionate-leveraging isnot an optimal strategy under liquidity risk. As target return increases, the required minimum portfolio-leverage increases at an increasing-rate, while the Sharpe-Leverage frontiers are progressively-dominated. These results contrastwith the classical portfolio theory that assumes no liquidity risk, and ourempirical analysis using ETF asset-data verifies that ignoring liquidity impactmay lead to severe portfolio under-performance.

During and after the lecture, more than 20 scholars and students from BUAA SEM discussedthe key points of the talk with Prof. Edirisinghe, and also raised quite a few relevantquestions,which provoke further thinking on the issue from both parties.