Multiperiod portfolio allocation: A study of volatility clustering, non-normalities and predictable returns

Jean-Guy Simonato and Michel Denault

The North American Journal of Economics and Finance, 2023, vol. 68, issue C

Abstract: This paper examines the dynamic, multiperiod portfolio choices of an investor facing predictable returns with volatility clustering and non-normalities, two pervasive stock return data characteristics. With a portfolio of one risk-free and one risky asset, we calibrate the model to the U.S. stock market and consider multiperiod choices, GARCH volatilities and Johnson-distributed non-normal errors. Quadrature techniques are used to determine the optimal allocation of the risky asset. The results show that accounting for volatility clustering strongly reduces the large hedging demands typically obtained with predictable returns. Non-normalities have modest impacts on allocations. Out-of-sample tests reveal that despite the changes in allocation observed in many cases, little statistical evidence is found that the Certainty Equivalent returns are impacted by multiperiod portfolios, nor by portfolios based on non-normal error.

Keywords: Dynamic asset allocation; Portfolio optimization; Return predictability; Volatility clustering; GARCH volatility; Non-normal returns; Johnson distribution; Dynamic programming; Gauss–Hermite quadrature (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062940823001201
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823001201

DOI: 10.1016/j.najef.2023.101997

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().