Parametric Portfolio Policies with Common Volatility Dynamics

Yunus Emre Ergemen () and Abderrahim Taamouti
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Yunus Emre Ergemen: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: A parametric portfolio policy function is considered that incorporates common stock volatility dynamics to optimally determine portfolio weights. Reducing dimension of the traditional portfolio selection problem significantly, only a number of policy parameters corresponding to first- and second-order characteristics are estimated based on a standard method-of-moments technique. The method, allowing for the calculation of portfolio weight and return statistics, is illustrated with an empirical application to 30 U.S. industries to study the economic activity before and after the recent financial crisis.

Keywords: Parametric portfolio policy; stock characteristics; volatility common factors (search for similar items in EconPapers)
JEL-codes: C13 C21 C23 C58 G11 G15 (search for similar items in EconPapers)
Pages: 22
Date: 2015-08-26
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