Factor-based portfolio optimization

Jun Kyung Auh and Wonho Cho

Economics Letters, 2023, vol. 228, issue C

Abstract: A parsimonious factor model mitigates idiosyncratic noise in historical data for portfolio optimization. We use market predictors and machine learning to incorporate forward-looking information into expected returns. The combination of the factor model and forward-looking returns improves out-of-sample performance, conforming to the theoretical assumption that the mean and variance correspond to future returns.

Keywords: Portfolio optimization; Factor model; Algorithmic trading; Machine learning (search for similar items in EconPapers)
JEL-codes: G12 G14 G24 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:228:y:2023:i:c:s0165176523001623

DOI: 10.1016/j.econlet.2023.111137

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