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A New Benchmark for Dynamic Mean-Variance Portfolio Allocations

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  • Langlois, Hugues

    (HEC Paris)

Abstract

We propose a new methodology to implement unconditionally optimal dynamic mean-variance portfolios. We model portfolio allocations using an auto-regressive process in which the shock to the portfolio allocation is the gradient of the investor's realized certainty equivalent with respect to the allocation. Our methodology can accommodate transaction costs, short-selling and leverage constraints, and a large number of assets. In out-of-sample tests using equity portfolios, long-short factors, government bonds, and commodities, we find that its risk-adjusted performance, net of transaction costs, is on average more than double that of other benchmark allocations.

Suggested Citation

  • Langlois, Hugues, 2020. "A New Benchmark for Dynamic Mean-Variance Portfolio Allocations," HEC Research Papers Series 1368, HEC Paris.
    • Handle: RePEc:ebg:heccah:1368
    DOI: 10.2139/ssrn.3548138
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    More about this item

    Keywords

    Portfolio Choice; Mean-Variance; Asset Allocation; Estimation Risk;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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