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This paper investigates whether the use of robust covariance improves portfolio performance and, in the presence of uncertainty, whether the 1/N strategy is as good as you think. In addition to sample covariance, we use a battery of robust covariance matrix. Our empirical evidence has two...
Persistent link: https://www.econbiz.de/10013035481
Investors often adopt mean-variance efficient portfolios for achieving superior risk-adjusted returns. However, such portfolios are sensitive to estimation errors, which affect portfolio performance. To understand the impact of estimation errors, I develop simple and intuitive formulas of the...
Persistent link: https://www.econbiz.de/10013000366
I jointly treat two critical issues in the application of mean-variance portfolios, i.e., estimation risk and portfolio instability. I find that theory-based portfolio strategies known to outperform naive diversification (1/N) in the absence of transaction costs, heavily underperform it under...
Persistent link: https://www.econbiz.de/10013019291
Banks must manage their trading books, not just value them. Pricing includes valuation adjustments collectively known as XVA (at least credit, funding, capital and tax), so management must also include XVA. In trading book management we focus on pricing, hedging, and allocation of prices or...
Persistent link: https://www.econbiz.de/10013040052
This paper adopts a copula approach at assessing the dependence structure of the U.S. equity market. Seven types of copulas are considered: Gaussian, Student t, Clayton, rotated Clayton, Gumbel, rotated Gumbel and BB4. By adopting a twenty-two year sample of daily returns on the seventeen Fama...
Persistent link: https://www.econbiz.de/10013133874
Linear multifactor models are of great importance in portfolio construction and risk management since they provide market dimensionality reduction, which has numerous useful implications. In particular, factor models reduce the dimensionality of the asset covariance matrix, allowing for better...
Persistent link: https://www.econbiz.de/10013114777
Persistent link: https://www.econbiz.de/10013050012
We investigate portfolio selection performance as in Markowitz by evaluating variance matrix estimation criteria in the currency market. This study challenges theoretically rigorous shrinkage covariance estimators using multiple evaluation metrics: systematic loss function, risk profile of...
Persistent link: https://www.econbiz.de/10015192454
Instead of data-mining methods, the author proposes a portfolio committee approach to portfolio selection. Because each optimal portfolio is a combination of three basic elements: strategy, covariance matrix, and risk type; therefore, the author first augments the combination to 250 optimal...
Persistent link: https://www.econbiz.de/10012828133
The quantitative practice of portfolio selection aims to select the in-sample optimal portfolio that is robust out of sample. However, at each estimation period, the conventional method is selection by solving a given objective function, without a learning mechanism, or training. This paper...
Persistent link: https://www.econbiz.de/10012863453