Modern portfolio management with conditioning information

I-Hsuan Ethan Chiang

Journal of Empirical Finance, 2015, vol. 33, issue C, 114-134

Abstract: This paper studies models in which active portfolio managers utilize conditioning information unavailable to their clients to optimize performance relative to a benchmark. We derive explicit solutions for the optimal strategies with multiple risky assets, with or without a risk-free asset, and consider various constraints on portfolio risks or weights. The optimal strategies feature a mean–variance efficient component (to minimize portfolio variance), and a hedging demand for the benchmark portfolio (to maximize correlation with the benchmark). A currency portfolio example shows that the optimal strategies improve the measured performance by 53% out of sample, compared with portfolios ignoring conditioning information.

Keywords: Portfolio management; Conditioning information; Benchmark; Tracking error; Foreign exchange (search for similar items in EconPapers)
JEL-codes: C44 G11 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:33:y:2015:i:c:p:114-134

DOI: 10.1016/j.jempfin.2015.05.003

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