Optimal portfolio choice under decision-based model combinations

Davide Pettenuzzo () and Francesco Ravazzolo

No 2014/15, Working Paper from Norges Bank

Abstract: We propose a novel Bayesian model combination approach where the combination weights depend on the past forecasting performance of the individual models entering the combination through a utility-based objective function. We use this approach in the context of stock return predictability and optimal portfolio decisions, and investigate its forecasting performance relative to a host of existing combination schemes. We find that our method produces markedly more accurate predictions than the existing model combinations, both in terms of statistical and economic measures of out-of-sample predictability. We also investigate the role of our model combination method in the presence of model instabilities, by considering predictive regressions that feature time-varying regression coefficients and stochastic volatility. We find that the gains from using our model combination method increase significantly when we allow for instabilities in the individual models entering the combination.

Keywords: Bayesian econometrics; Time-varying parameters; Model combinations; Portfolio choice (search for similar items in EconPapers)
JEL-codes: C11 C22 G11 G12 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2014-11-24
New Economics Papers: this item is included in nep-for, nep-ore and nep-upt
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.norges-bank.no/en/Published/Papers/Working-Papers/2014/15/

Related works:
Journal Article: Optimal Portfolio Choice Under Decision‐Based Model Combinations (2016)
Working Paper: Optimal Portfolio Choice under Decision-Based Model Combinations (2015)
Working Paper: Optimal Portfolio Choice under Decision-Based Model Combinations (2014)
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:bno:worpap:2014_15

Access Statistics for this paper

More papers in Working Paper from Norges Bank Contact information at EDIRC.
Bibliographic data for series maintained by ().