An Out-of-Sample Evaluation of Dynamic Portfolio Strategies
Forthcoming in the Review of Finance
55 Pages Posted: 25 Mar 2008 Last revised: 25 Nov 2014
Date Written: June 1, 2014
This paper evaluates out-of-sample portfolio performance for a real-time investor who can exploit time variation in the conditional mean and volatility of stock returns in optimizing a multiperiod portfolio choice problem.
With the presence of parameter uncertainty, our out-of-sample analysis shows that ignoring time variation in the first two return moments leads to significant utility costs of at least 1.97% of annualized certainty equivalent return.
Accounting for the time-varying risk premium plays a more important role than considering time-varying volatility in improving portfolio performance.
Interestingly, behaving myopically or ignoring the hedge against changes in future investment opportunities can lead to small out-of-sample utility losses or even utility gains.
Keywords: dynamic portfolio choice, real-time portfolio performance, out-of-sample portfolio performance
JEL Classification: G11, G12
Suggested Citation: Suggested Citation