Trading Strategies Generated by Lyapunov Functions

Functional portfolio generation, initiated by E.R. Fernholz almost twenty years ago, is a methodology for constructing trading strategies with controlled behavior. It is based on very weak and descriptive assumptions on the covariation structure of the underlying market model, and needs no estimation of model parameters. In this paper, the corresponding generating functions $G$ are interpreted as Lyapunov functions for the vector process $μ(\cdot)$ of market weights; that is, via the property th...