The First Academic Paper with a Shotgun Picture in it

The First Academic Paper with a Shotgun Picture in it

July 2, 2015 Tactical Asset Allocation Research

Last updated on January 18th, 2017 at 02:52 pm

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Here is one of the figures in a Journal of Finance paper published in 2013 by N. Garleanu and L Pedersen.

The figure depicts various portfolio optimizations under different assumptions and then has a visualization equivalent with hockey players, skeet shooters, and missile systems.

I’m not sure how many readers follow hard-core academic publications, but this is pretty wild. I’ve read 1000’s of academic finance papers and never seen anything like this.

I’m a fan.

oddjfpicture

Dynamic Trading with Predictable Returns and Transaction Costs

This paper derives in closed form the optimal dynamic portfolio policy when trading is costly and security returns are predictable by signals with different mean reversion speeds. The optimal updated portfolio is a linear combination of the existing portfolio, the optimal current portfolio absent trading costs, and the optimal portfolio based on future expected returns. Predictors with slower mean reversion (alpha decay) get more weight since they lead to a favorable positioning both now and in the future. We implement the optimal policy for commodity futures and show that the resulting portfolio has superior returns net of trading costs relative to more naive benchmarks. Finally, we derive natural equilibrium implications, including that demand shocks with faster mean reversion command a higher return premium.

 


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About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.