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Mean–variance optimization under affine GARCH: A utility-based solution

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  • Escobar-Anel, Marcos
  • Spies, Ben
  • Zagst, Rudi

Abstract

Affine GARCH models have recently been explored in the context of portfolio optimization, although in a quite narrow setting in terms of utility functions and risk aversion. This work notably extends existing results, accommodating a richer class of objective functions for a large family of GARCH models. In particular, our approach allows for connections to constant proportion portfolio insurance (CPPI) and mean–variance portfolio strategies. We explore the latter numerically based on S&P 500 market data, revealing that a GARCH model clearly outperforms a homoscedastic variant in terms of the efficient frontier.

Suggested Citation

  • Escobar-Anel, Marcos & Spies, Ben & Zagst, Rudi, 2024. "Mean–variance optimization under affine GARCH: A utility-based solution," Finance Research Letters, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:finlet:v:59:y:2024:i:c:s1544612323011212
    DOI: 10.1016/j.frl.2023.104749
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    More about this item

    Keywords

    Dynamic portfolio optimization; Affine GARCH models; Mean–variance; Efficient frontier; HARA utility; CPPI strategy;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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