A theoretical foundation of portfolio resampling

Gabriel Frahm ()

Theory and Decision, 2015, vol. 79, issue 1, 107-132

Abstract: A portfolio-resampling procedure invented by Richard and Robert Michaud is a subject of highly controversial discussion and big scientific dispute. It has been evaluated in many empirical studies and Monte Carlo experiments. Apart from the contradictory findings, the Michaud approach still lacks a theoretical foundation. I prove that portfolio resampling has a strong foundation in the classic theory of rational behavior. Every noise trader could do better by applying the Michaud procedure. By contrast, a signal trader who has enough prediction power and risk-management skills should refrain from portfolio resampling. The key note is that in most simulation studies, investors are considered as noise traders. This explains why portfolio resampling performs well in simulation studies, but could be mediocre in real life. Copyright Springer Science+Business Media New York 2015

Keywords: Asset allocation; Mean–variance analysis; Noise trader; Out-of-sample performance; Portfolio resampling; Resampled efficiency; Signal trader; Primary G11; Secondary D81 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11238-014-9453-0

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