Dynamic Optimal Portfolio Selection in a VAR Framework

CORE Discussion Paper No. 2004/57

32 Pages Posted: 19 Feb 2006

See all articles by Erick W. Rengifo

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS)

J. V. K. Rombouts

HEC Montreal; Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE); Center for Interuniversity Research and Analysis on Organization (CIRANO)

Date Written: July 2004

Abstract

We propose a dynamic portfolio selection model that maximizes expected returns subject to a Value-at-Risk constraint. The model allows for time varying skewness and kurtosis of portfolio distributions estimating the model parameters by weighted maximum likelihood in a increasing window setup. We determine the best daily investment recommendations in terms of percentage to borrow or lend and the optimal weights of the assets in the risky portfolio. Two empirical applications illustrate in an out-of-sample context which models are preferred from a statistical and economic point of view. We find that the APARCH(1,1) model outperforms the GARCH(1,1) model. A sensitivity analysis with respect to the distributional innovation hypothesis shows that in general the skewed-t is preferred to the normal and Student-t.

Keywords: Portfolio Selection, Value-at-Risk, Skewed-t distribution, Weighted Maximum Likelihood

JEL Classification: C32, C35, G10

Suggested Citation

Rengifo, Erick W. and Rombouts, Jeroen, Dynamic Optimal Portfolio Selection in a VAR Framework (July 2004). CORE Discussion Paper No. 2004/57. Available at SSRN: https://ssrn.com/abstract=882795 or http://dx.doi.org/10.2139/ssrn.882795

Erick W. Rengifo (Contact Author)

Fordham University - Department of Economics - Center for International Policy Studies (CIPS) ( email )

United States
0017188174061 (Phone)
0017188173518 (Fax)

Jeroen Rombouts

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

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B-1348 Louvain-la-Neuve, b-1348
Belgium

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE) ( email )

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

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