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Parametric Portfolio Policies : Exploiting Characteristics in the Cross Section of Equity Returns

Author: Michael W Brandt; Pedro Santa-Clara; Rossen Valkanov
Publisher: Cambridge, Mass. National Bureau of Economic Research 2004.
Series: Working paper series (National Bureau of Economic Research), no. w10996.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
We propose a novel approach to optimizing portfolios with large numbers of assets. We model directly the portfolio weight in each asset as a function of the asset's characteristics. The coefficients of this function are found by optimizing the investor's average utility of the portfolio's return over the sample period. Our approach is computationally simple, easily modified and extended, produces sensible portfolio  Read more...
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Details

Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Michael W Brandt; Pedro Santa-Clara; Rossen Valkanov
OCLC Number: 1027273896
Notes: December 2004.
Description: 1 online resource.
Details: Mode of access: World Wide Web.
Series Title: Working paper series (National Bureau of Economic Research), no. w10996.
Responsibility: Michael W. Brandt, Pedro Santa-Clara, Rossen Valkanov.

Abstract:

We propose a novel approach to optimizing portfolios with large numbers of assets. We model directly the portfolio weight in each asset as a function of the asset's characteristics. The coefficients of this function are found by optimizing the investor's average utility of the portfolio's return over the sample period. Our approach is computationally simple, easily modified and extended, produces sensible portfolio weights, and offers robust performance in and out of sample. In contrast, the traditional approach of first modeling the joint distribution of returns and then solving for the corresponding optimal portfolio weights is not only difficult to implement for a large number of assets but also yields notoriously noisy and unstable results. Our approach also provides a new test of the portfolio choice implications of equilibrium asset pricing models. We present an empirical implementation for the universe of all stocks in the CRSP-Compustat dataset, exploiting the size, value, and momentum anomalies.

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