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A dynamic conditional approach to forecasting portfolio weights

Fabrizio Cipollini, Giampiero Gallo () and Alessandro Palandri

International Journal of Forecasting, 2021, vol. 37, issue 3, 1111-1126

Abstract: From the autoregressive representation of the portfolio-variance optimization problem, we derive a novel model for conditional portfolio weights as a linear function of past conditional and realized (and, hence, observable) terms. This dynamic conditional weights (DCW) approach is benchmarked against popular model-based and model-free specifications in terms of weights forecasts and portfolio allocations. Next to portfolio turnover and variance, we introduce the break-even transaction cost as an additional measure that identifies the range of transaction costs for which one allocation is preferred to another. By comparing minimum-variance portfolios built on the components of the Dow Jones 30 Index, the proposed DCW attains the best allocations overall with respect to the measures considered, for any degree of risk aversion, transaction costs, and exposure.

Keywords: Portfolio allocation; Realized volatility; Realized correlations; Dynamic conditional modeling; Portfolio weights modeling (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:37:y:2021:i:3:p:1111-1126

DOI: 10.1016/j.ijforecast.2020.12.002

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