An Out-of-Sample Evaluation of Dynamic Portfolio Strategies

Forthcoming in the Review of Finance

EFA 2008 Athens Meetings Paper

55 Pages Posted: 25 Mar 2008 Last revised: 25 Nov 2014

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: June 1, 2014

Abstract

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

Lan, Chunhua, An Out-of-Sample Evaluation of Dynamic Portfolio Strategies (June 1, 2014). Forthcoming in the Review of Finance; EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1108775 or http://dx.doi.org/10.2139/ssrn.1108775

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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