Dynamic Portfolio Selection by Augmenting the Asset Space

Michael W. Brandt and Pedro Santa-Clara

No 10372, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G0 G1 (search for similar items in EconPapers)
Date: 2004-03
New Economics Papers: this item is included in nep-fin
Note: AP
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Published as Brandt, Michael W. and Pedro Santa-Clara. "Dynamic Portfolio Selection By Augmenting The Asset Space," Journal of Finance, 2006, v61(5,Oct), 2187-2217.

Downloads: (external link)
http://www.nber.org/papers/w10372.pdf (application/pdf)

Related works:
Journal Article: Dynamic Portfolio Selection by Augmenting the Asset Space (2006)
Working Paper: Dynamic Portfolio Selection by Augmenting the Asset Space (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:10372

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w10372

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().