Equity Valuation and Portfolio Management

CHALLENGES FOR QUANTITATIVE EQUITY INVESTING

The studies we have just discussed suggested challenges that participants see in implementing quantitative strategies. We can see a number of additional challenges. Robust optimization, robust estimation, and the integration of the two are probably on the research agenda of many firms. As asset management firms strive to propose innovative products, robust and flexible optimization methods will be high on the R&D agenda. In addition, as asset management firms try to offer investment strategies to meet a stream of liabilities (i.e., measured against liability benchmarking), multistage stochastic optimization methods will become a priority for firms wanting to compete in this arena. Pan, Sornette, and Kortanek call “Intelligent Finance” the new field of theoretical finance at the confluence of different scientific disciplines.²³ According to them, the theoretical framework of intelligent finance consists of four major components: (1) financial information fusion, (2) multilevel stochastic dynamic process models, (3) active portfolio and total risk management, and (4) financial strategic analysis.

Modelers are facing the problem of performance decay that is the consequence of a wider use of models. Classical financial theory assumes that agents are perfect forecasters in the sense that they know the stochastic processes of prices and returns. Agents do not make systematic predictable mistakes: their action keeps the market efficient. This ...