Title:Leveraged Portfolio Selection under Liquidity Risk: Model, Theory, and Computation
Presenter:Chanaka Edirisinghe
Hosted by:Associate Prof. Chen Jingnan
Time:2018.7.919:00-21:00
Location:A618
Abstract:
When a financial portfolio is rebalanced under market conditions to satisfy leverage and other restrictions, asset illiquidity adversely-impacts trading prices, and hence, the portfolio's performance. Using a continuous-time trading 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 is not 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 contrast with the classical portfolio theory that assumes no liquidity risk, and our empirical analysis using ETF asset-data verifies that ignoring liquidity impact may lead to severe portfolio under-performance.
If time permits, I will also consider a specific situation involving only de-leveraging, where the model is simplified to maximize portfolio’s expected value under leverage and margin limits. This leads to a separable model, but it is extremely difficult to solve due to non-convexity. I will present a new and general dual cutting plane technique that solves the Lagrangian dual more-efficiently. The sensitivities of the optimal deleveraging strategy to leverage and margin limits will be discussed in the context of the above data set.
About the presenter
Dr. Chanaka Edirisinghe holds a BS (Mechanical Engineering), an M.Eng (Industrial Engineering and Management), and a Ph.D. (Management Science) from University of British Columbia, Canada. He has published extensively in operations research and finance, focusing on quantitative finance topics, as well as stochastic and quadratic optimization. His research appears in Management Science, Operations Research, Mathematical Programming, Mathematics of Operations Research, as well as in Journal of Financial and Quantitative Analysis, Journal of Banking and Finance, and Quantitative Finance, among others. He received the Citation of Excellence Award by Emerald Management Reviews in 2009 for publishing one of the top 50 management research articles in the world. He was a former Vice Chair of Financial Services Section, as well as Optimization Society of INFORMS, and he was the General Chair of the INFORMS 2016 annual conference.
