Frequency-Domain Information for Active Portfolio Management

Bank of Finland Research Discussion Paper No. 2/2020

39 Pages Posted: 31 Jan 2020

See all articles by Gonçalo Faria

Gonçalo Faria

Catholic University of Portugal (UCP) - School of Economics and Management and CEGE

Fabio Verona

Bank of Finland - Research

Date Written: January 9, 2020

Abstract

We assess the benefits of using frequency-domain information for active portfolio management. To do so, we forecast the bond risk premium and equity risk premium using a methodology that isolates frequencies (of the predictors) with the highest predictive power. The resulting forecasts are more accurate than those of traditional forecasting methods for both asset classes. When used in the context of active portfolio management, the forecasts based on frequency-domain information lead to better portfolio performances than when using the original time series of the predictors. It produces higher information ratio (0.57 vs 0.45), higher CER gains (1.12% vs 0.81%), and lower maximum drawdown (19.1% vs 19.6%).

Keywords: equity risk premium, bond risk premium, predictability, multiresolution analysis, active portfolio management

JEL Classification: C58, G11, G17

Suggested Citation

Faria, Gonçalo and Verona, Fabio, Frequency-Domain Information for Active Portfolio Management (January 9, 2020). Bank of Finland Research Discussion Paper No. 2/2020. Available at SSRN: https://ssrn.com/abstract=3527688

Gonçalo Faria (Contact Author)

Catholic University of Portugal (UCP) - School of Economics and Management and CEGE ( email )

Universidade Católica Portuguesa
Rua Diogo Botelho 1327
Porto, 4169-005
Portugal

Fabio Verona

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

HOME PAGE: http://bofcris.solenovo.fi/crisyp/disp/_/en/cr_redir_all/fet/fet/sea?direction=3&id=3827426

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