A1723
Title: Smooth FREE COMFORT: Mixing IID and GARCH-based frameworks for optimal portfolio performance
Authors: Marc Paolella - University of Zurich (Switzerland) [presenting]
Jeffrey Naef - ETHZ (Switzerland)
Pawel Polak - Columbia University (United States)
Abstract: The fundamental goals associated with active portfolio management include the choice and weights for assets that result in high medium- and long-term performance, beating benchmarks in terms of risk and return. GARCH-based multivariate models for asset returns can outperform their IID counterparts, but often only when transaction costs are not accounted for, because of the high turnover induced by the ever-changing dispersion matrix. A setup is considered based on a smooth transition between IID and GARCH-based models, and, based on a large data set of stock returns, demonstrates that the optimum lies between the two extremes. Further enhancements are introduced via use of a LASSO-based shrinkage paradigm.
