An Evaluation of Conditional Multi-Factor Models in Active Asset Allocation Strategies: An Empirical Study for the German Stock Market

Financial Markets and Portfolio Management, Vol. 23, No. 3, pp. 285-313, 2009

Posted: 19 Jun 2010

See all articles by Marcus Deetz

Marcus Deetz

FOM Fachhochschule für Oekonomie & Management gGmbH

Thorsten Poddig

University of Bremen

Irina Sidorovitch

University of Bremen

Armin Varmaz

Brown University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 17, 2009

Abstract

This paper examines the out-of-sample performance of asset allocation strategies that use conditional multi-factor models to forecast expected returns and estimate the future variance and covariance. We find that strategies based on conditional multi-factor models outperform strategies based on unconditional multi-factor models, and do better than a passive buy-and-hold strategy. However, a strategy that uses the sample mean as a return forecast is superior. We also find that the estimation of the covariance matrices based on the conditional and unconditional multi-factor models does not improve the performance of the active asset allocation strategy relative to the incorporation of the historical covariance matrices. These results are fairly robust to different estimation approaches, as well as to the impact of transaction costs and the consideration of upper and lower bounds for the portfolio weights.

Keywords: Conditional factor-models, Asset allocation, German stock market

JEL Classification: G11, G12, C31, C32, C53

Suggested Citation

Deetz, Marcus and Poddig, Thorsten and Sidorovitch, Irina and Varmaz, Armin, An Evaluation of Conditional Multi-Factor Models in Active Asset Allocation Strategies: An Empirical Study for the German Stock Market (July 17, 2009). Financial Markets and Portfolio Management, Vol. 23, No. 3, pp. 285-313, 2009, Available at SSRN: https://ssrn.com/abstract=1626345

Marcus Deetz (Contact Author)

FOM Fachhochschule für Oekonomie & Management gGmbH ( email )

Herkulesstrasse 32
Essen, 45127
Germany

Thorsten Poddig

University of Bremen ( email )

Universitaetsallee GW I
Bremen, D-28334
Germany

Irina Sidorovitch

University of Bremen ( email )

Universitaetsallee GW I
Bremen, D-28334
Germany

Armin Varmaz

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

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