Portfolio selection in a data-rich environment

Mohammed Bouaddi and Abderrahim Taamouti

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 12, 2943-2962

Abstract: We model portfolio weights as a function of latent factors that summarize the information in a large number of economic variables. This approach (hereafter diffusion index approach) offers the opportunity to exploit a much richer information base to improve portfolio selection. We use factor analysis to estimate the space spanned by the factors. This provides consistent estimates for the optimal weights as the number of economic variables and sample size go to infinity. We consider an empirical application to illustrate the practical usefulness of our approach. The results indicate that the diffusion index approach helps to improve the portfolio performance.

Keywords: Portfolio's weights modeling; Factor analysis; Principal components; Portfolio performance; Stock returns; Fama–French factors; Economic factors; VIX (search for similar items in EconPapers)
JEL-codes: C13 C43 G11 G19 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:12:p:2943-2962

DOI: 10.1016/j.jedc.2013.08.010

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