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Can long-run dynamic optimal strategies outperform fixed-mix portfolios? Evidence from multiple data sets
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Bianchi, Daniele and Guidolin, Massimo (2014) Can long-run dynamic optimal strategies outperform fixed-mix portfolios? Evidence from multiple data sets. European Journal of Operational Research, 236 (1). pp. 160-176. doi:10.1016/j.ejor.2014.01.030 ISSN 0377-2217.
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Official URL: http://dx.doi.org/10.1016/j.ejor.2014.01.030
Abstract
Using five alternative data sets and a range of specifications concerning the underlying linear predictability models, we study whether long-run dynamic optimizing portfolio strategies may actually outperform simpler benchmarks in out-of-sample tests. The dynamic portfolio problems are solved using a combination of dynamic programming and Monte Carlo methods. The benchmarks are represented by two typical fixed mix strategies: the celebrated equally-weighted portfolio and a myopic, Markowitz-style strategy that fails to account for any predictability in asset returns. Within a framework in which the investor maximizes expected HARA (constant relative risk aversion) utility in a frictionless market, our key finding is that there are enormous difference in optimal long-horizon (in-sample) weights between the mean–variance benchmark and the optimal dynamic weights. In out-of-sample comparisons, there is however no clear-cut, systematic, evidence that long-horizon dynamic strategies outperform naively diversified portfolios.
| Item Type: | Journal Article | ||||||
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| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Journal or Publication Title: | European Journal of Operational Research | ||||||
| Publisher: | Elsevier Science BV | ||||||
| ISSN: | 0377-2217 | ||||||
| Official Date: | 13 January 2014 | ||||||
| Dates: |
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| Volume: | 236 | ||||||
| Number: | 1 | ||||||
| Page Range: | pp. 160-176 | ||||||
| DOI: | 10.1016/j.ejor.2014.01.030 | ||||||
| Status: | Peer Reviewed | ||||||
| Publication Status: | Published | ||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||
| Related URLs: |
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