Review of Financial Studies Vol. 19 No. 1 2006
Asset Allocation with a High Dimensional Latent Factor Stochastic Volatility Model
Abstract
We investigate the implications of time-varying expected return and volatility on asset allocation in a high dimensional setting. We propose a dynamic factor multivariate stochastic volatility (DFMSV) model that allows the first two moments of returns to vary over time for a large number of assets. We then evaluate the economic significance of the DFMSV model by examining the performance of various dynamic portfolio strategies chosen by mean-variance investors in a universe of 36 stocks. We find that the DFMSV dynamic strategies significantly outperform various bench-mark strategies out of sample. This outperformance is robust to different performance measures, investor's objective functions, time periods, and assets.
- Volume
- 19
- Issue
- 1
- Pages
- 237-271
- Sources
- bibtex:phds-export.bib