Variable selection for portfolio choice

Yacine Aït-Sahalia, Michael W. Brandt

Research output: Contribution to journalArticle

168 Scopus citations

Abstract

We study asset allocation when the conditional moments of returns are partly predictable. Rather than first model the return distribution and subsequently characterize the portfolio choice, we determine directly the dependence of the optimal portfolio weights on the predictive variables. We combine the predictors into a single index that best captures time variations in investment opportunities. This index helps investors determine which economic variables they should track and, more importantly, in what combination. We consider investors with both expected utility (mean variance and CRRA) and nonexpected utility (ambiguity aversion and prospect theory) objectives and characterize their market timing, horizon effects, and hedging demands.

Original languageEnglish (US)
Pages (from-to)1297-1351
Number of pages55
JournalJournal of Finance
Volume56
Issue number4
DOIs
StatePublished - Aug 2001

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Variable selection for portfolio choice'. Together they form a unique fingerprint.

Cite this