Asset Allocation with a High Dimensional Latent Factor Stochastic Volatility Model

Han, Yufeng

doi:10.2139/ssrn.334762

Abstract

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Asset Allocation with a High Dimensional Latent Factor Stochastic Volatility Model

Yufeng Han

University of Colorado at Denver - Business School

January 2005

AFA 2003 Washington, DC Meetings

Abstract:
We investigate the implications of time-varying expected return and volatility on asset allocation in a high-dimensional setting. We propose a DFMSV model that allows the first two moments of returns to vary over time for a large number of assets. We then evaluate the economic significance of the DFMSV model by examining the performance of various dynamic portfolio strategies chosen by mean-variance investors in a universe of 36 stocks. We find that the DFMSV dynamic strategies significantly outperform various benchmark strategies out of sample. This outperformance is robust to different performance measures, investor's objective functions, time periods, and assets.

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Date posted: October 17, 2002

Suggested Citation

Han, Yufeng, Asset Allocation with a High Dimensional Latent Factor Stochastic Volatility Model (January 2005). AFA 2003 Washington, DC Meetings. Available at SSRN: http://ssrn.com/abstract=334762 or http://dx.doi.org/10.2139/ssrn.334762

Contact Information

Yufeng Han (Contact Author)

University of Colorado at Denver - Business School ( email )

1475 Lawrence St.
Denver, CO 80204
United States
303-3158458 (Phone)