A Premium for Parameter Uncertainty in Equities

15 Pages Posted: 29 Jun 2014 Last revised: 3 Aug 2014

See all articles by Michael Hanke

Michael Hanke

University of Liechtenstein

Alex Weissensteiner

Free University of Bolzano Bozen

Date Written: August 3, 2014

Abstract

The literature on the effects of parameter uncertainty on optimal portfolio choice suggests the existence of a premium for parameter uncertainty in asset returns. We use a simple extension to classical mean-variance portfolio optimization and devise a robust strategy to benefit from such a premium. Using well-known, long time series of equity returns, we show that this strategy indeed outperforms competitor strategies and yields positive and significant alphas relative to the most prominent factor models. We interpret these results to provide empirical support for the existence of a parameter uncertainty premium in equity returns.

Keywords: parameter uncertainty, portfolio choice

JEL Classification: G11

Suggested Citation

Hanke, Michael and Weissensteiner, Alex, A Premium for Parameter Uncertainty in Equities (August 3, 2014). Available at SSRN: https://ssrn.com/abstract=2459918 or http://dx.doi.org/10.2139/ssrn.2459918

Michael Hanke (Contact Author)

University of Liechtenstein ( email )

Fuerst Franz Josef-Strasse
Vaduz, FL-9490
Liechtenstein

Alex Weissensteiner

Free University of Bolzano Bozen ( email )

Universitätsplatz 1
Bolzano, 39100
+39 0471 013496 (Phone)

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