A Kalman-Filter Approach for Dynamic Multi-Asset Portfolio Optimization

A Kalman-Filter Approach for Dynamic Multi-Asset Portfolio Optimization: The Value of Noise Trading

Presented by: Lavinia Rognone - Alliance Manchester Business School

Time: doors opening at 5.15pm with the presentation starting at 5.30pm Sharpe

Cost: Free (drinks and canapés sponsored by Northfield and Qontigo)

Abstract

Decomposing the prices of the portfolio assets (stocks, bonds, and gold) into a permanent and a transitory noise component using a Kalman filter. We exploit the transitory price component to create a dynamic noise-timing strategy (under a mean-variance framework) that anticipates mispricing and that turns out to provide significant gains compared to benchmark strategies. Our proposed strategy offers a novel and practical tool to manage the so-called noise price risk, i.e. asset price variation in absence of fundamental change, known to affect investors holdings.

Lavinia Rognone

Lavinia Rognone is a Postdoctoral researcher in finance at Alliance Manchester Business School (AMBS), University of Manchester, and she will be joining the University of Edinburgh (UoE) Business School as a Lecturer in Sustainable Finance in mid-June 2022. She is part of the Centre for Financial and Technologies Studies at AMBS, and will join the Centre for Business, Climate Change, and Sustainability at UoE Business School. As external position, she served as an Economist and as a Climate Change Expert at the European Central Bank (ECB) in the Monetary Policy Division, where she mainly worked on academic research on climate finance and machine learning/text-analysis applications, besides being involved in policy-related work. She designed and constructed daily text-based climate risk indicators for physical and transition risk, which find applications to both risk and portfolio management issues, among others, and are already used by academics worldwide, and also National Banks, and the ECB. During her doctoral studies, she was a visiting researcher at the National University of Singapore where she was hosted by the department of Mathematics and the Risk Management Institute for a research collaboration on the role of noise price risk for portfolio allocation.

She holds a Ph.D. in finance from AMBS and her research spreads across multiple disciplines including asset pricing, portfolio/risk management, green/climate finance, FinTech, and text-mining applications to finance. Her research has been published in academic journals, such as the Journal of International Financial Markets, Institutions & Money, Economics Letters, and the International Review of Financial Analysis, and presented at several international conferences.

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