Asset Allocation with a High Dimensional Latent Factor Stochastic Volatility Model
University of Colorado at Denver - Business School
AFA 2003 Washington, DC Meetings
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.
Number of Pages in PDF File: 41working papers series
Date posted: October 17, 2002
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