This book concerns the use of concepts from statistical physics in the description of financial systems. The authors illustrate the scaling concepts used in probability theory, critical phenomena, and fully developed turbulent fluids. These concepts are then applied to financial time series. The authors also present a stochastic model that displays several of the statistical properties observed in empirical data. Statistical physics concepts such as stochastic dynamics, short- and long-range correlations, self-similarity and scaling permit an understanding of the global behaviour of economic systems without first having to work out a detailed microscopic description of the system. Physicists will find the application of statistical physics concepts to economic systems interesting. Economists and workers in the financial world will find useful the presentation of empirical analysis methods and well-formulated theoretical tools that might help describe systems composed of a huge number of interacting subsystems.

/pdf/introduction-to-econophysics-correlations-and-complexity-in-4a1wviggsu.pdf

Introduction to Econophysics: Correlations and Complexity in Finance

. Over 25 years ago, in Sharpe [1966], I introduced a measure for the performance of mutual funds and proposed the term reward-to-variability ratio to describe it (the measure is also described in Sharpe [1975] ). While the measure has gained considerable popularity, the name has not. Other authors have termed the original version the Sharpe Index (Radcliff [1990, p. 286] and Haugen [1993, p. 315]), the Sharpe Measure (Bodie, Kane and Marcus [1993, p. 804], Elton and Gruber [1991, p. 652], and Reilly [1989, p.803]), or the Sharpe Ratio (Morningstar [1993, p. 24]). Generalized versions have also appeared under various names (see. for example, BARRA [1992, p. 21] and Capaul, Rowley and Sharpe [1993, p. 33]).

The Sharpe Ratio

The purpose of this paper is to demonstrate that a portfolio optimization model using the L1 risk (mean absolute deviation risk) function can remove most of the difficulties associated with the classical Markowitz's model while maintaining its advantages over equilibrium models In particular, the L1 risk model leads to a linear program instead of a quadratic program, so that a large-scale optimization problem consisting of more than 1,000 stocks may be solved on a real time basis Numerical experiments using the historical data of NIKKEI 225 stocks show that the L1 risk model generates a portfolio quite similar to that of the Markowitz's model within a fraction of time required to solve the latter

https://www.bertrand-maillet.net/bibliography/KonnoYamazaki_1991_Preview.pdf

Mean-absolute deviation portfolio optimization model and its applications to Tokyo stock market

Founding family ownership and the agency cost of debt

We show that results from the theory of random matrices are potentially of great interest to understand the statistical structure of the empirical correlation matrices appearing in the study of multivariate time series. The central result of the present study, which focuses on the case of financial price fluctuations, is the remarkable agreement between the theoretical prediction (based on the assumption that the correlation matrix is random) and empirical data concerning the density of eigenvalues associated to the time series of the different stocks of the S 500 (or other major markets). In particular, the present study raises serious doubts on the blind use of empirical correlation matrices for risk management.

/pdf/noise-dressing-of-financial-correlation-matrices-ha0hc1orh0.pdf

Noise Dressing of Financial Correlation Matrices

An update of a classic book in the field, Modern Portfolio Theory examines the characteristics and analysis of individual securities as well as the theory and practice of optimally combining securities into portfolios. It stresses the economic intuition behind the subject matter while presenting advanced concepts of investment analysis and portfolio management. Readers will also discover the strengths and weaknesses of modern portfolio theory as well as the latest breakthroughs.

/pdf/modern-portfolio-theory-and-investment-analysis-3cglxl084r.pdf

Edwin J. Elton

Papers

Modern Portfolio Theory and Investment Analysis