Dynamic mean-variance portfolio selection under factor models

Yun Shi, Lingjie Kong, Lanzhi Yang, Duan Li and Xiangyu Cui

Journal of Economic Dynamics and Control, 2024, vol. 167, issue C

Abstract: Utilizing insights from financial literature and empirical financial data, we introduce a comprehensive system of factor models designed to capture both return and risk dynamics. Our focus extends to addressing the multi-period mean-variance portfolio selection challenge within the framework of these proposed factor models. Through rigorous analysis, we formulate a semi-analytical optimal portfolio policy, characterized by a linear relationship with the current wealth level. The coefficients of this optimal policy are intricately linked to a specific stochastic process known as the future investment opportunity (FIO), reflecting the investor's anticipation of future investment prospects. Furthermore, empirical examination within the U.S. market context underscores the efficacy of our approach. By incorporating the factor models for return and risk, our optimal portfolio policy exhibits superior out-of-sample Sharpe ratio compared to benchmark policies.

Keywords: Multi-period mean-variance model; Factor models; Common factor of risk; Sharpe ratio (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:167:y:2024:i:c:s0165188924001155

DOI: 10.1016/j.jedc.2024.104923

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