Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098681 | Journal of Economic Dynamics and Control | 2013 | 20 Pages |
Abstract
We model portfolio weights as a function of latent factors that summarize the information in a large number of economic variables. This approach (hereafter diffusion index approach) offers the opportunity to exploit a much richer information base to improve portfolio selection. We use factor analysis to estimate the space spanned by the factors. This provides consistent estimates for the optimal weights as the number of economic variables and sample size go to infinity. We consider an empirical application to illustrate the practical usefulness of our approach. The results indicate that the diffusion index approach helps to improve the portfolio performance.
Keywords
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Mohammed Bouaddi, Abderrahim Taamouti,