MARKET TIMING IN PARAMETRIC PORTFOLIO POLICIES

Carlos Osorio, Thorsten Poddig (), Christian Fieberg (), Michael Olschewsky () and Michael Falge ()
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Carlos Osorio: Chair of Finance, University of Bremen, Enrique-Schmidt-Straße 1, Bremen 28359, Germany
Thorsten Poddig: Chair of Finance, University of Bremen, Enrique-Schmidt-Straße 1, Bremen 28359, Germany
Christian Fieberg: Empirical Capital Market Research and Derivatives, University of Bremen, Enrique-Schmidt-Straße 1, Bremen 28359, Germany
Michael Olschewsky: Quantitative Asset Management, Treasury, Hamburger Sparkasse, Wikingerweg 1, Hamburg 20537, Germany
Michael Falge: Chair of Finance, University of Bremen, Enrique-Schmidt-Straße 1, Bremen 28359, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2022, vol. 25, issue 04n05, 1-28

Abstract: We extend the parametric portfolio policies that exploit firm characteristics to optimize portfolios of stocks and are thus based on asset selection. In addition to this, our extension exploits market indicators for market timing purposes (i.e. optimal allocations between stocks and a risk-free asset). We demonstrate the mechanics of the proposed technique in simulation studies. Specifically, we show that the extended approach is able to produce portfolios based on selection and timing that outperform portfolios that only apply selection, when the applied market indicators have sufficient predictive power. In purely demonstrative empirical applications, we illustrate how investors can use our optimization approach using common market indicators.

Keywords: Parametric portfolio policy; market timing; asset selection; portfolio optimization (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1142/S0219024922500182

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