Variable selection for portfolio choice

Published

Journal Article

We study asset allocation when the conditional moments of returns are partly predictable. Rather than first model the return distribution and subsequently characterize the portfolio choice, we determine directly the dependence of the optimal portfolio weights on the predictive variables. We combine the predictors into a single index that best captures time variations in investment opportunities. This index helps investors determine which economic variables they should track and, more importantly, in what combination. We consider investors with both expected utility (mean variance and CRRA) and nonexpected utility (ambiguity aversion and prospect theory) objectives and characterize their market timing, horizon effects, and hedging demands.

Full Text

Duke Authors

Cited Authors

  • Aït-Sahalia, Y; Brandt, MW

Published Date

  • January 1, 2001

Published In

Volume / Issue

  • 56 / 4

Start / End Page

  • 1297 - 1351

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/0022-1082.00369

Citation Source

  • Scopus