Enhancing Multi-Asset Portfolio Construction Under Modern Portfolio Theory with a Robust Co-Movement Measure

20 Pages Posted: 9 Jul 2015 Last revised: 13 Jul 2015

Sander Gerber

Hudson Bay Capital Management, LP

Harry Markowitz

University of California at San Diego

Punit Pujara

Hudson Bay Capital Management, LP

Date Written: July 8, 2015

Abstract

Markowitz’s mean-variance MPT has remained the cornerstone of portfolio selection methods after decades of research and debate. There is an extensive literature on MPT implementation, especially on estimation errors and expected return assumptions. However, covariance matrix estimation, an essential input, continues to be frequently based on historical correlations. This study proposes replacing historical correlations with a robust co-movement measure called the Gerber Statistic. We report that MPT using the Gerber Statistic outperformed that using historical correlation as measured by ex-post returns under realistic investment constraints, including transaction costs, for a range of investor types, for an investment universe of global stock indices, bonds and commodities, for the period January 1994 to December 2013.

Keywords: Portfolio Management

Suggested Citation

Gerber, Sander and Markowitz, Harry and Pujara, Punit, Enhancing Multi-Asset Portfolio Construction Under Modern Portfolio Theory with a Robust Co-Movement Measure (July 8, 2015). Available at SSRN: https://ssrn.com/abstract=2627803 or http://dx.doi.org/10.2139/ssrn.2627803

Sander Gerber

Hudson Bay Capital Management, LP ( email )

777 Third Avenue
New York, NY NY 10017
United States

Harry Markowitz

University of California at San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
(858) 534-3383 (Phone)

Punit Pujara (Contact Author)

Hudson Bay Capital Management, LP ( email )

777 Third Avenue
New York, NY NY 10017
United States

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