The Economic Value of Exploiting Time-Varying Return Moments

53 Pages Posted: 3 Mar 2008 Last revised: 25 Nov 2008

See all articles by Chunhua Lan

Chunhua Lan

University of New Brunswick - Fredericton; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2008

Abstract

This paper studies the economic value of exploiting time variation in risk premia and in the volatility of stock returns for a real-time investor in a dynamic setting. I find that ignoring time variation in these return moments leads to economically and statistically significant utility costs. Time-varying risk premia play a more important role than time-varying volatility in forming portfolio weights and in improving portfolio performance for the real-time investor who can rebalance portfolios quarterly. In addition, dynamic policies are more susceptible to parameter uncertainty than myopic policies. This effect further reduces the utility costs of myopic behavior. This study also indicates that conducting an out-of-sample evaluation is necessary to assess the value of a dynamic portfolio policy because in-sample analysis can be misleading.

Keywords: Dynamic portfolio choices, real-time portfolio performance, out-of-sample portfolio performance

JEL Classification: G11

Suggested Citation

Lan, Chunhua, The Economic Value of Exploiting Time-Varying Return Moments (November 1, 2008). EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1100968 or http://dx.doi.org/10.2139/ssrn.1100968

Chunhua Lan (Contact Author)

University of New Brunswick - Fredericton ( email )

Bailey Drive
P.O. Box 4400
Fredericton NB E3B 5A3
Canada

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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