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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. |
Full
text: |