Can Long-Run Dynamic Optimal Strategies Outperform Fixed-Mix Portfolios? Evidence from Multiple Data Sets

30 Pages Posted: 13 Nov 2013

See all articles by Daniele Bianchi

Daniele Bianchi

School of Economics and Finance, Queen Mary University of London

Massimo Guidolin

Bocconi University, Dept. of Finance; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Date Written: June 29, 2013

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 differences 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.

Keywords: Finance, Investment analysis, Portfolio choice, Predictability, Vector autoregressive models, Out-of-sample performance

JEL Classification: G11, C93

Suggested Citation

Bianchi, Daniele and Guidolin, Massimo, Can Long-Run Dynamic Optimal Strategies Outperform Fixed-Mix Portfolios? Evidence from Multiple Data Sets (June 29, 2013). WBS Finance Group Research Paper No. 211, Available at SSRN: https://ssrn.com/abstract=2353761 or http://dx.doi.org/10.2139/ssrn.2353761

Daniele Bianchi (Contact Author)

School of Economics and Finance, Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

HOME PAGE: http://whitesphd.com

Massimo Guidolin

Bocconi University, Dept. of Finance ( email )

Via Roentgen, 1
2nd floor
Milan, MI 20136
Italy

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti 25
Milan, 20136
Italy

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
162
Abstract Views
1,450
Rank
330,928
PlumX Metrics