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UCLA Recent Work Title Dynamic Portfolio Selection by Augmenting the Asset Space Permalink
| Content Provider | Semantic Scholar |
|---|---|
| Author | Brandt, Michael W. Santa-Clara, Pedro |
| Copyright Year | 2004 |
| Abstract | We present a novel approach to dynamic portfolio selection that is no more difficult to implement than the static Markowitz model. The idea is to expand the asset space to include simple (mechanically) managed portfolios and compute the optimal static portfolio in this extended asset space. The intuition is that a static choice among managed portfolios is equivalent to a dynamic strategy. We consider managed portfolios of two types: “conditional” and “timing” portfolios. Conditional portfolios are constructed along the lines of Hansen and Richard (1987). For each variable that affects the distribution of returns and for each basis asset, we include a portfolio that invests in the basis asset an amount proportional to the level of the conditioning variable. Timing portfolios invest in each basis asset for a single period and therefore mimic strategies that buy and sell the asset through time. We apply our method to a problem of dynamic asset allocation across stocks, bonds, and cash using the predictive ability of four conditioning variables. ∗We thank Michael Brennan, John Campbell, Rob Engle, Rick Green, Francis Longstaff, Eduardo Schwartz, Rob Stambaugh, Rossen Valkanov, Luis Viceira, Shu Yan, an anonymous referee, and seminar participants at Baruch College, Barclays Global Investors, Lehman Brothers, NYU, and Morgan Stanley for helpful comments. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | https://cloudfront.escholarship.org/dist/prd/content/qt632436gt/qt632436gt.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
