Sebastien Lleo

Sebastien Lleo
NEOMA Business School | NEOMA · Department of Finance

PhD

About

58
Publications
10,258
Reads
How we measure 'reads'
A 'read' is counted each time someone views a publication summary (such as the title, abstract, and list of authors), clicks on a figure, or views or downloads the full-text. Learn more
325
Citations
Citations since 2016
26 Research Items
241 Citations
201620172018201920202021202201020304050
201620172018201920202021202201020304050
201620172018201920202021202201020304050
201620172018201920202021202201020304050

Publications

Publications (58)
Article
We propose a continuous‐time model in which investors use expert forecasts to construct a benchmark‐outperforming portfolio in two steps. The estimation step takes the form of a Kalman filter. The control step derives the optimal investment policy in closed form and establishes that the value function is the unique classical solution to the Hamilto...
Article
Expert forecasts are an essential component of asset management and an important research topic. However, the effect of behavioral biases on expert forecasts is generally ignored. This paper examines the effect of biased expert forecasts on asset allocations. We find that biases have a significant impact on portfolios, explaining nearly 70% of exce...
Article
Warren Buffett suggested that the ratio of the market value of all publicly traded stocks to the Gross National Product could identify potential overvaluations and undervaluations in the US equity market when this ratio deviates above 120% or below 80%. We investigate whether this ratio is a statistically significant predictor of equity market corr...
Article
A fully implementable portfolio model combining mental accounting and Black-Litterman to accommodate views on expected returns with multiple attitudes to risk
Chapter
Financial disasters to hedge funds, bank trading departments, and individual speculative traders and investors almost always occur because of non-diversification in all possible scenarios, being overbet and being hit by a bad scenario. Black swans, namely those scenarios that are unexpected and extreme, are the worst type of bad scenario. The Swiss...
Article
We extend the literature on crash prediction models in three main ways. First, we explicitly relate crash prediction measures and asset pricing models. Second, we present a statistical significance test for crash prediction models. Finally, we propose a definition and a measure of robustness for these models. We apply our statistical test and measu...
Article
In this article, the authors describe a simple procedure for combining statistical estimates with expert opinions to produce a view of future asset performance. The authors discuss the impact of behavioral bias on these views and propose general modeling principles to reduce this bias. They use standard linear filtering techniques to combine statis...
Article
A new jump diffusion regime-switching model is introduced, which allows for linking jumps in asset prices with regime changes. We prove the existence and uniqueness of the solution to the risk-sensitive asset management criterion maximization problem in this setting. We provide an ODE for the optimal value function, which may be efficiently solved...
Article
Stochastic optimisation has found a fertile ground for applications in finance. One of the greatest challenges remains to incorporate a set of scenarios that accurately model the behaviour of financial markets, and in particular their behaviour during crashes and crises, without sacrificing the tractability of the optimal investment policy. This pa...
Article
We discuss the bond-stock earnings yield differential model (BSEYD) starting from when Ziemba first used it in Japan in 1988 through 2016 in various countries. The model has called many but not all crashes. Those have high interest rates in the most liquid long-term bonds relative to the trailing earnings-to-price ratio. In general, when the model...
Article
Full-text available
Financial disasters to hedge funds, bank trading departments and individual speculative traders and investors seem to always occur because of non-diversification in all possible scenarios, being overbet and being hit by a bad scenario. Black swans are the worst type of bad scenario: unexpected and extreme. The Swiss National Bank decision on 15 Jan...
Article
In a 2001 interview, Warren Buffett suggested that the ratio of the market value of all publicly traded stocks to the Gross National Product could identify potential overvaluations and undervaluations in the US equity market. In this paper, we investigate whether this ratio is a statistically significant predictor of equity market downturns.
Article
Financial disasters to hedge funds, bank trading departments and individual speculative traders and investors seem to always occur because of non-diversification in all possible scenarios, being overbet and being hit by a bad scenario. Black swans are the worst type of bad scenario: unexpected and extreme. The Swiss National Bank decision on 15 Jan...
Article
This paper proposes a continuous time version of the Black-Litterman model that accounts for, and corrects, some of the main behavioural biases that analysts may exhibit. We formulate the model as a stochastic control problem under partial observations, and derive the optimal investment strategy and value function in closed form. We implement this...
Article
Full-text available
In this paper, we estimate behavioural factors—Keynes’ ‘animal spirits’—in the property market. An enhanced hidden Markov model is used, for both the Shiller Home Price Index and a consumer confidence index. We conclude that both house prices and consumer confidence are driven by another hidden behavioural factor, interpreted as ‘animal spirits’. B...
Article
Full-text available
The mathematisation of finance, the excessive use of mathematical models in finance, has been partly blamed for the recent financial and economic crisis. In this paper we argue that the problem might actu-ally be a financialization of mathematics, as evidenced by the grad-ual embedding of branches of mathematics into finance and financial economics...
Article
A new jump diffusion regime-switching model is introduced, which allows for linking jumps in asset prices with regime changes. We prove the existence and uniqueness of the solution to the risk-sensitive asset management criterion maximisation problem in this setting. We provide an ODE for the optimal value function, which may be efficiently solved...
Article
What makes futures hedge funds fail? The common ingredient is over betting and not being diversified in some bad scenarios that can lead to disaster. Once troubles arise, it is difficult to take the necessary actions that eliminate the problem. Moreover, many hedge fund operators tend not to make decisions to minimize losses but rather tend to bet...
Article
Full-text available
In this paper, we use risk-sensitive control methods to solve a jump-diffusion asset–liability management (ALM) problem. We show that the ALM problem admits a unique classical ( \(C^{1,2}\) ) solution under two different sets of assumptions.
Article
We provide a historical perspective focusing on Ziemba's experiences and research on the bond-stock earnings yield differential model (BSEYD) starting from when he first used it in Japan in 1988 through to the present in 2014. The model has called many but not all crashes. Those called have high interest rates in long term bonds relative to the tra...
Article
In this paper we estimate behavioural factors -- Keynes' 'animal spirits' -- in the property market. An enhanced Hidden Markov Model is used, for both the Shiller Home Price Index and a consumer confidence index. We conclude that both house prices and consumer confidence are driven by another hidden behavioural factor: 'animal spirits.' Both data s...
Article
The mathematisation of finance - excessive use of mathematical models in finance - has been blamed for the recent financial and economic crisis. We argue that the problem might actually be the financialisation of mathematics, as evidenced by the gradual embedding of branches of mathematics into financial economics. We find that the concept of embed...
Article
In this article, we extend the Black-Litterman approach to a continuous time setting. We model analyst views jointly with asset prices to estimate the unobservable factors driving asset returns. The key in our approach is that the filtering problem and the stochastic control problem are effectively separable. We use this insight to incorporate anal...
Article
In this paper, we extend the literature on crash prediction models in three main respects. First, we relate explicitly crash prediction measures and asset pricing models. Second, we present a simple, effective statistical significance test for crash prediction models. Finally, we propose a definition and a measure of robustness for crash prediction...
Article
This paper presents three definitions of time diversification and analyzes their implications for investment horizons. Using decision quality criteria and methodology, we question standard advice. In analyzing time diversification with a minimum of assumptions, we answer two main questions: how to rigorously define time diversification and what con...
Article
In several countries a major factor contributing to the current economic crisis was massive borrowing to fund investment projects on the basis of, in retrospect, grossly optimistic valuations. The purpose of this paper is to initiate an approach to project valuation and risk management in which ‘behavioural’ factors—Keynes’ ‘animal spirits’ or Gree...
Article
This paper investigates the diversification benefits of indirect real estate investments in market downturns. We model the dependence structure between REITs and traditional assets by using a mixed-copula framework within a regime switching model. The Clayton copula dominates in the mixture. We showed that correlations increase during periods of hi...
Article
We investigate the stock market crashes in China, Iceland, and the US in the 2007-2009 period. The bond stock earnings yield difference model is used as a prediction tool. Historically, when the measure is too high, meaning that long bond interest rates are too high relative to the trailing earnings over price ratio, then there usually is a crash o...
Article
In this paper, we investigate the explanatory power of the Schwartz and Moon (2000; 2001) equity valuation model in the context of IT companies. We perform a valuation of eBay over the last nine years (2001-2009) and a cross-sectional analysis of all companies listed in the S&P IT index in 2009. Our goal is to identify the critical valuation parame...
Article
Full-text available
In this article we extend earlier work on the jump-diffusion risk-sensitive asset management problem [SIAM J. Fin. Math. (2011) 22-54] by allowing jumps in both the factor process and the asset prices, as well as stochastic volatility and investment constraints. In this case, the HJB equation is a partial integro-differential equation (PIDE). By co...
Article
Full-text available
In this paper, we extend the definition of fractional Kelly strategies to the case where the investor's objective is to outperform an invest-ment benchmark. These benchmarked fractional Kelly strategies are efficient portfolios even when asset returns are not lognormally dis-tributed. We deduce the benchmarked fractional Kelly strategies for variou...
Article
Full-text available
In this paper, we extend the jump-diffusion model proposed by Davis and Lleo to include jumps in asset prices as well as valuation factors. The criterion, following earlier work by Bielecki, Pliska, Nagai and others, is risk-sensitive optimization (equivalent to maximizing the expected growth rate subject to a constraint on variance.) In this setti...
Article
Full-text available
This paper considers a portfolio optimization problem in which asset prices are represented by SDEs driven by Brownian motion and a Poisson random measure, with drifts that are functions of an auxiliary diffusion factor process. The criterion, following earlier work by Bielecki, Pliska, Nagai and others, is risk-sensitive optimization (equivalent t...
Article
Full-text available
This paper considers a portfolio optimization problem in which asset prices are represented by SDEs driven by Brownian motion and a Poisson random measure, with drifts that are functions of an auxiliary diffusion 'factor' process. The criterion, following earlier work by Bielecki, Pliska, Nagai and others, is risk-sensitive optimization (equivalent...
Article
Full-text available
This paper extends the risk-sensitive asset management theory developed by Bielecki and Pliska and by Kuroda and Nagai to the case where the investor's objective is to outperform an investment benchmark. The main result is a mutual fund theorem. Every investor following the same benchmark will take positions, in proportions dependent on his/her ris...
Article
In this second part, we discuss the predictive ability of the BSEYD model, applications of the BSEYD to the USA in 2007, Iceland in 2008, the Chinese stock market in 2009 and in 2015, and introduce other crash measures. These measures include the price-to-earnings ratio, Robert Shiller's Cyclically adjusted price-to-earnings ratio, Warren Buffet's...

Network

Cited By

Projects

Projects (2)
Project
To solve various asset management problems (utility maximization, active-passive allocation, asset and liability management, retirement planning...) using risk-sensitive stochastic control.