Article ID Journal Published Year Pages File Type
7360697 Journal of Empirical Finance 2016 14 Pages PDF
Abstract
Recent advances in covariance estimation can improve portfolio formation strategies aimed at avoiding high risk market environments. We consider a covariance specification with information variables that include both historical firm specific variables and an ex ante measure of macro volatility (CBOE VIX). We compare the in-sample and predictive out-of-sample performance of the information instrument model relative to three alternative approaches. Out-of-sample, a risk-on, risk-off strategy that optimally weights the global minimum variance (GMV) portfolio and a riskless asset shows the information instrument model provides effective exit signals during the financial crisis and other high risk environments.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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