A Dynamic Conditional Approach to Portfolio Weights Forecasting

35 Pages Posted: 22 May 2020

See all articles by Fabrizio Cipollini

Fabrizio Cipollini

Universita di Firenze, DiSIA (Dipartimento di Statistica, Informatica, Applicazioni)

Giampiero M. Gallo

Corte dei Conti - Italian Court of Audits; University of Bologna - Rimini Center for Economic Analysis (RCEA); Universita' di Firenze - Dipartimento di Statistica, Informatica, Applicazioni "G.Parenti"

Alessandro Palandri

DCU Business School

Date Written: April 26, 2020

Abstract

We build the time series of optimal realized portfolio weights from high-frequency data and we suggest a novel Dynamic Conditional Weights (DCW) model for their dynamics. DCW is benchmarked against popular model-based and model-free specifications in terms of weights forecasts and portfolio allocations. Next to portfolio variance, certainty equivalent, and turnover, we introduce the break-even transaction costs as an additional measure that identifies the range of transaction costs for which one allocation is preferred to another. By comparing minimum-variance portfolios built on the components of the Dow Jones 30 Index, the proposed DCW overall attains the best allocations with respect to the measures considered, for any degree of risk-aversion, transaction costs, and exposure.

Keywords: Portfolio Allocation, Realized Volatility, Realized Correlations, Dynamic Conditional Modeling, Portfolio Weights Modeling

JEL Classification: C32, C53, G11, G17

Suggested Citation

Cipollini, Fabrizio and Gallo, Giampiero M. and Palandri, Alessandro, A Dynamic Conditional Approach to Portfolio Weights Forecasting (April 26, 2020). Available at SSRN: https://ssrn.com/abstract=3585791 or http://dx.doi.org/10.2139/ssrn.3585791

Fabrizio Cipollini

Universita di Firenze, DiSIA (Dipartimento di Statistica, Informatica, Applicazioni) ( email )

Viale Morgagni, 59
Florence, Florence 50134
Italy
+39 055 2751592 (Phone)
+39 055 4223560 (Fax)

Giampiero M. Gallo (Contact Author)

Corte dei Conti - Italian Court of Audits ( email )

viale Mazzini
Roma, Roma 00195
Italy

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Universita' di Firenze - Dipartimento di Statistica, Informatica, Applicazioni "G.Parenti" ( email )

Viale G.B. Morgagni, 59
Florence, 50134
Italy
0039 055 2751 591 (Phone)
0039 055 4223560 (Fax)

HOME PAGE: http://www.disia.unifi.it/gallog

Alessandro Palandri

DCU Business School ( email )

Dublin 9
Ireland

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
31
Abstract Views
195
PlumX Metrics