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Digital Library

of the European Council for Modelling and Simulation

 

Title:

Path Dependency In Investment Strategies – A Simulation Based Illustration

Authors:

Agnes Vidovics-Dancs, Peter Juhasz, Janos Szaz

Published in:

 

(2014).ECMS 2014 Proceedings edited by: Flaminio Squazzoni, Fabio Baronio, Claudia Archetti, Marco Castellani  European Council for Modeling and Simulation. doi:10.7148/2014

 

ISBN: 978-0-9564944-8-1

 

28th European Conference on Modelling and Simulation,

Brescia, Italy, May 27th – 30th, 2014

Citation format:

Agnes Vidovics-Dancs, Peter Juhasz, Janos Szaz (2014). Path Dependency In Investment Strategies – A Simulation Based Illustration, ECMS 2014 Proceedings edited by: Flaminio Squazzoni, Fabio Baronio, Claudia Archetti, Marco Castellani  European Council for Modeling and Simulation. doi:10.7148/2014-0758

DOI:

http://dx.doi.org/10.7148/2014-0758

Abstract:

In finance, the term path dependency is typically used when valuing derivative assets like American or Asian type options. Our simulation based example illustrates that the final payoff of an investment strategy could also depend on the previous historical price movements of the asset in our portfolio even if the final selling price of the asset itself is independent of it.

As illustration, we use the real life monthly return data of the shares of the Hungarian oil company (MOL), and we show that it does matter what path the stock price follows from the purchase to the date of selling if we finance our portfolio from a debt requiring regular payments throughout the holding period. In our model the investor covers the required cash outflows by selling some of the shares originally bought. Over a ten year period one may achieve a total return between -100.0 and 1,026.0 per cent depending on the path of the share quotation generated randomly by mixing real life monthly returns. In 7.95 per cent of the cases we would even go bankrupt before the 10 years are over.

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