Does anything beat parametric portfolio policies?

• Autor(a) principal: Galocha, Rita Bugalho Vidas
• Data de Publicação: 2016
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.14/21044
• topic: Domínio/Área Científica::Ciências Sociais::Economia e Gestão

This thesis’ objective is to test the parametric portfolio policies (PPP) approach to asset allocation developed by Brandt, Santa-Clara and Valkanov (2009) on an investment universe of large stocks. I enlarge the number of conditional variables to include volatility and tail risk alongside value, size and momentum. I introduce a novel approach by using industry specific standardization when normalizing the characteristics. I also model the stocks for both the unconstrained and the long-only portfolio of stocks. Using a power utility function as representative of the investor’s preferences I test this approach using the Standard & Poor’s 500 as a market proxy. I include a sensibility analysis to different risk aversion coefficients. I conclude that despite the overall good performance of this strategy it should not be seen as a way to hedge the market exposure, but as a way to ’ride’ the market with high risk adjusted returns. I find that an investor always prefers small stocks and past winners. The preference between value and growth stocks depends on the models specifications.