Modeling fundamental analysis into portfolio selection

Zhang, H.; Yan, C.

doi:10.1080/14697688.2017.1418520

Modeling fundamental analysis into portfolio selection

Zhang, H.; Yan, C.

Authors

H. Zhang

C. Yan

Abstract

We derive a closed-form appraisal/information ratio of the investors who are able to observe some information about security fundamentals, by solving a simple instantaneous mean-variance portfolio choice problem in a continuous-time framework. Both analytical and numerical results suggest that investors should choose securities with a more volatile mispricing, a less volatile fundamental, a higher mean-reverting speed and a larger dividend. Our model calibrated with realistic parameters easily outperforms top-percentile portfolio managers in reality, which suggests that the implementation of fundamental analysis may be impeded in practice due to limits of arbitrage. Our paper is a first, necessarily simple, step towards filling the gap of modelling fundamental analysis in portfolio selection.

Citation

Zhang, H., & Yan, C. (2018). Modeling fundamental analysis into portfolio selection. Quantitative Finance, 18(8), 1315-1326. https://doi.org/10.1080/14697688.2017.1418520

Journal Article Type	Article
Acceptance Date	Dec 13, 2017
Online Publication Date	Feb 22, 2018
Publication Date	Feb 22, 2018
Deposit Date	Jan 2, 2018
Publicly Available Date	Aug 22, 2019
Journal	Quantitative Finance
Print ISSN	1469-7688
Electronic ISSN	1469-7696
Publisher	Taylor and Francis Group
Peer Reviewed	Peer Reviewed
Volume	18
Issue	8
Pages	1315-1326
DOI	https://doi.org/10.1080/14697688.2017.1418520
Public URL	https://durham-repository.worktribe.com/output/1369462

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Copyright Statement
This is an Accepted Manuscript of an article published by Taylor & Francis in Quantitative finance on 22 Feb 2018, available online: https://doi.org/10.1080/14697688.2017.1418520