TITLE:
Predicting Risk/Return Performance Using Upper Partial Moment/Lower Partial Moment Metrics
AUTHORS:
Fred Viole, David Nawrocki
KEYWORDS:
Partial Moments, Asymmetric Nonlinear Utility, Entropy, Non-Stationary Benchmark
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.6 No.5,
November
24,
2016
ABSTRACT: Minimizing the classical definition of risk should be a counterintuitive venture as the explanatory nature of historical metrics’ construction challenges their ability to serve a predictive purpose on a non-stationary process. We uncover an ill-conceived bias in these metrics and discover that they provide a contrary indication to an investment’s survivability. The breakdown in the explanatory-predictive link is troubling and we aim to correct this via a better derived explanatory metric. The predictive variant of our metric will directly question the notion of optimization in order to serve the first priority of any continuous system, survival.