Dynamic portfolio optimization with conditional heteroscedastic generalized dynamic factor models
Shiohama, Takayuki Hallin, Marc Taniguchi, Masanobu Veredas, David
Shiohama, Takayuki
Hallin, Marc
Taniguchi, Masanobu
Veredas, David
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Publication Type
Journal article
Editor
Supervisor
Publication Year
2010
Journal
Journal of the Japanese Statistical Society
Book
Publication Volume
40
Publication Issue
Publication Begin page
145
Publication End page
166
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Abstract
We model large panels of financial time series by means of generalized dynamic factor models with multivariate GARCH idiosyncratic components. Such models combine the features of dynamic factors with those of a generalized smooth transition conditional correlation (GSTCC) model, which belongs to the class of time-varying conditional correlation models. The model is applied to dynamic portfolio allocation with Value at Risk constraints on 6.5 years of daily TOPIX Sector Indexes. Results show that the proposed model yields better portfolio performance than other multivariate models proposed in the literature, including the traditional mean-variance approach.
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Keywords
Accounting & Finance