TY - JOUR
T1 - Enhancing mean-variance portfolio selection by modeling distributional asymmetries
AU - Yew Low, Rand Kwong
AU - Faff, Robert
AU - Aas, Kjersti
PY - 2016/5/1
Y1 - 2016/5/1
N2 - Why do mean-variance (MV) models perform so poorly? In searching for an answer to this question, we estimate expected returns by sampling from a multivariate probability model that explicitly incorporates distributional asymmetries. Specifically, our empirical analysis shows that an application of copulas using marginal models that incorporate dynamic features such as autoregression, volatility clustering, and skewness to reduce estimation error in comparison to historical sampling windows. Using these copula-based models, we find that several MV-based rules exhibit statistically significant and superior performance improvements even after accounting for transaction costs. However, we find that outperforming the naïve equally-weighted (1/N) strategy after accounting for transactions costs still remains an elusive task.
AB - Why do mean-variance (MV) models perform so poorly? In searching for an answer to this question, we estimate expected returns by sampling from a multivariate probability model that explicitly incorporates distributional asymmetries. Specifically, our empirical analysis shows that an application of copulas using marginal models that incorporate dynamic features such as autoregression, volatility clustering, and skewness to reduce estimation error in comparison to historical sampling windows. Using these copula-based models, we find that several MV-based rules exhibit statistically significant and superior performance improvements even after accounting for transaction costs. However, we find that outperforming the naïve equally-weighted (1/N) strategy after accounting for transactions costs still remains an elusive task.
UR - http://www.scopus.com/inward/record.url?scp=84956692995&partnerID=8YFLogxK
U2 - 10.1016/j.jeconbus.2016.01.003
DO - 10.1016/j.jeconbus.2016.01.003
M3 - Article
AN - SCOPUS:84956692995
SN - 0148-6195
VL - 85
SP - 49
EP - 72
JO - Journal of Economics and Business
JF - Journal of Economics and Business
ER -