Enhancing mean-variance portfolio selection by modeling distributional asymmetries

Low, Rand Kwong Yew, Faff, Robert and Aas, Kjersti (2016) Enhancing mean-variance portfolio selection by modeling distributional asymmetries. Journal of Economics and Business, 85 49-72. doi:10.1016/j.jeconbus.2016.01.003


Author Low, Rand Kwong Yew
Faff, Robert
Aas, Kjersti
Title Enhancing mean-variance portfolio selection by modeling distributional asymmetries
Journal name Journal of Economics and Business   Check publisher's open access policy
ISSN 0148-6195
Publication date 2016-01-20
Sub-type Article (original research)
DOI 10.1016/j.jeconbus.2016.01.003
Open Access Status Not Open Access
Volume 85
Start page 49
End page 72
Total pages 24
Place of publication Philadelphia, PA United States
Publisher Elsevier
Collection year 2017
Language eng
Abstract 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.
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status UQ
Additional Notes Available online 20 January 2016

Document type: Journal Article
Sub-type: Article (original research)
Collections: HERDC Pre-Audit
UQ Business School Publications
 
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Created: Fri, 29 Jan 2016, 15:27:58 EST by Karen Morgan on behalf of UQ Business School