Global CAPE Model Optimization
BPG and Associates; affiliation not provided to SSRN
Richardson GMP - Darwin Investment Strategies
BPG and Associates
Mebane T. Faber
Cambria Investment Management
October 18, 2012
We use the Shiller CAPE Model proposed by Mebane Faber as a template for the exploration of a variety of portfolio optimization methods. By virtue of the Model's systematic allocation to the 'cheapest' markets with the highest theoretical risk premia, the model has the potential to extract high costs from 'behavioural taxes' related to the model’s extreme volatility and drawdown character. We apply several portfolio optimization techniques with the objective of maximizing portfolio Sharpe ratios and minimizing drawdowns, including dynamic volatility weighting, risk parity, target risk and minimum variance. Consistent with recent published research on robust portfolio optimization, return to risk ratios improve broadly, with the greatest impact achieved from procedures that manage positions and/or portfolios to an ex ante target volatility. A theoretical framework is also proposed.
Number of Pages in PDF File: 17
Keywords: CAPE, Shiller, Faber, Butler, Philbrick, Gordillo, GestaltU, Portfolio Optimization, Volatility, Risk Parity, Minimum Variance, Target Volatility, Risk Budget, Volatility Budget, Low Volatility Anomalyworking papers series
Date posted: October 18, 2012 ; Last revised: October 31, 2012
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo1 in 0.469 seconds