RelValAnalysis (version 1.0)

GetNewLambdaWeight: Portfolio Weights of the Lambda-strategy

Description

The function computes the portfolio weights of the lambda strategy.

Usage

GetNewLambdaWeight(pi.current, mu.next, energy, lambda = 0.5)

Value

A portfolio weight vector.

Details

The lambda-strategy is a simple energy-entropy strategy that depends on a parameter lambda between 0 and 1, see Section 6.1 of Pal and Wong (2013) for more details. Given the portfolio weights of the previous time period, the portfolio weights of the next period is a convex combination of the previous weights and the current market weights, chosen in such a way that the drift term is a constant proportion of the free energy. In this implementation an SDE approximation is used. Hence the function is accurate only when lambda is small (say

References

Pal, S. and T.-K. L. Wong (2013). Energy, entropy, and arbitrage. arXiv preprint arXiv:1308.5376.

See Also

GetLambdaWeight

Examples

pi.previous <- c(1/3, 1/3, 1/3)
mu.next <- c(0.5, 0.3, 0.2)
energy <- 0.05
lambda <- 0.3

GetNewLambdaWeight(pi.previous, mu.next, energy, lambda)