Variable selection for portfolio choice

Yacine Aït-Sahalia, Michael W. Brandt

Research output: Contribution to journalArticlepeer-review

193 Scopus citations


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
Issue number4
StatePublished - Aug 2001

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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