2024-03-29T06:29:12Zhttps://repositori.uji.es/oai/requestoai:repositori.uji.es:10234/1703482017-11-23T11:53:19Zcom_10234_8648com_10234_9col_10234_8649
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Carroll, Rachael
author
Conlon, Thomas
author
Cotter, John
author
2017-11-01
We assess the ability of minimum-variance portfolio allocation strategies accounting for time-varying correlation between assets to provide performance benefits relative to an equally-weighted portfolio. Prior to transaction costs correlation-based strategies emphatically outperform the equally-weighted benchmark. This finding is strongest for short horizon correlation forecasts and attributed to dynamic correlation as opposed to variance forecasts. Thus, estimation error is not found to be the primary obstacle to successful portfolio optimization. Rather, frequent rebalancing and associated transaction costs pose a significant challenge. Limiting portfolio turnover through short-selling restrictions and greater rebalancing error tolerance results in regular outperformance of the correlation based strategies even for large transaction costs. Taken together, these findings provide evidence of a trade-off between optimal portfolio performance, forecasting horizon, rebalancing frequency and transaction costs.
https://doi.org/10.1016/j.ejor.2017.04.015
http://hdl.handle.net/10234/170348
Decision analysis
Optimization
Asset allocation
Dynamic correlation
Rebalancing and transaction costs
Asset allocation with correlation: A composite trade-off