The Parametrization of an International Equity Portfolio: A Decomposition of Global Momentum Returns

58 Pages Posted: 31 Jul 2018 Last revised: 1 Nov 2018

See all articles by Christoph Reschenhofer

Christoph Reschenhofer

Vienna University of Economics and Business

Date Written: October 31, 2018

Abstract

Using a parametric portfolio optimization approach, I show how international momentum strategies can be significantly improved by decomposing global momentum returns. The parametrization models the optimal portfolio weights as a function of the decomposed components and overweights equity markets with positive momentum, a depreciating currency and low inflation rates. The optimization exhibits a significant gain in certainty equivalent and Sharpe ratio, while it is robust to various extensions and modifications. Taking both short selling restrictions and transaction costs into account, the strategy almost doubles the certainty equivalent and gains 23 percent in Sharpe ratio compared to a value weighted benchmark.

Keywords: Portfolio Choice, International Equity, Momentum Returns

JEL Classification: F31, F37, G11, G15

Suggested Citation

Reschenhofer, Christoph, The Parametrization of an International Equity Portfolio: A Decomposition of Global Momentum Returns (October 31, 2018). Available at SSRN: https://ssrn.com/abstract=3211305 or http://dx.doi.org/10.2139/ssrn.3211305

Christoph Reschenhofer (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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