Automated Portfolio Optimization Based on a New Test for Structural Breaks

Tobias Berens (), Dominik Wied and Daniel Ziggel ()
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Tobias Berens: Technische Universität Dortmund
Daniel Ziggel: FOM Hochschule für Oekonomie & Management gGmbH

Acta Universitatis Danubius. OEconomica, 2014, issue 10(2), 243-264

Abstract: We present a completely automated optimization strategy which combines the classical Markowitz mean-variance portfolio theory with a recently proposed test for structural breaks in covariance matrices. With respect to equity portfolios, global minimum-variance optimizations, which base solely on the covariance matrix, yield considerable results in previous studies. However, financial assets cannot be assumed to have a constant covariance matrix over longer periods of time. Hence, we estimate the covariance matrix of the assets by respecting potential change points. The resulting approach resolves the issue of determining a sample for parameter estimation. Moreover, we investigate if this approach is also appropriate for timing the reoptimizations. Finally, we apply the approach to two datasets and compare the results to relevant benchmark techniques by means of an out-of-sample study. It is shown that the new approach outperforms equally weighted portfolios and plain minimum-variance portfolios on average.

Keywords: Fluctuation Test; Markowitz; Structural Break (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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