Performance of Characteristics-Based Portfolio Choice

62 Pages Posted: 1 Oct 2020

See all articles by Thomas Gehrig

Thomas Gehrig

University of Vienna

Leopold Sögner

Institute for Advanced Studies (IHS); Vienna Graduate School of Finance (VGSF)

Arne Westerkamp

Vienna University of Economics and Business - Department of Accounting and Finance

Date Written: August 17, 2020

Abstract

We compare the performance of the characteristics-based parametric portfolio approach introduced by Brandt, Santa Clara and Valkanov (RFS 2009) with standard optimal portfolio investments on the basis of S&P-500 stocks. We establish that the characteristics-based parametric portfolio approach can only be exactly justified as optimal investment under exceedingly strong assumptions. Moreover, we find that the empirical implementation of the parametric portfolio policy approach to US-data (for 1995-2013) runs into difficulties at moderate levels of relative risk aversion. Without refinements an interior maximum of the expected utility functional need not exist. Finally, and despite the strong implicit assumptions required by theory, the characteristics-based approach compares reasonably well with optimal portfolio investment for absolute risk aversion even in the absence of transactions costs, when we run horse-races in simulated and empirical data.

Keywords: portfolio policy, expected utility, risk aversion, simulated data

JEL Classification: C51, G11, G12

Suggested Citation

Gehrig, Thomas and Sögner, Leopold and Westerkamp, Arne, Performance of Characteristics-Based Portfolio Choice (August 17, 2020). Available at SSRN: https://ssrn.com/abstract=3675310 or http://dx.doi.org/10.2139/ssrn.3675310

Thomas Gehrig

University of Vienna ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Leopold Sögner (Contact Author)

Institute for Advanced Studies (IHS) ( email )

Josefstädter Straße 39
1080 Vienna
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Arne Westerkamp

Vienna University of Economics and Business - Department of Accounting and Finance ( email )

Nordbergstraße 15, Bauteil B, 6. Stock
Wien 1090
Austria

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