Dynamic optimal portfolio selection in a VaR framework

Erick Rengifo and Jeroen Rombouts

No 2004057, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: We propose a dynamic portfolio selection model that maximizes expected returns subject to a Value-at-Risk constraint. The model allows for time varying skewness and kurtosis of portfolio distributions estimating the model parameters by weighted maximum likelihood in a increasing window setup. We determine the best daily investment recommendations in terms of percentage to borrow or lend and the optimal weights of the assets in the risky portfolio. Two empirical applications illustrate in an out-of-sample context which models are preferred from a statistical and economic point of view. We find that the APARCH(1,1) model outperforms the GARCH(1,1) model. A sensitivity analysis with respect to the distributional innovation hypothesis shows that in general the skewed-t is preferred to the normal and Student-t.

Keywords: portfolio selection; Value-at-Risk; skewed-t distribution; weighted maximum likelihood (search for similar items in EconPapers)
JEL-codes: C32 C35 G10 (search for similar items in EconPapers)
Date: 2004-07
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Citations: View citations in EconPapers (3)

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Working Paper: Dynamic Optimal Portfolio Selection in a VaR Framework (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2004057

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