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Portfolio Selection in a Data-Rich Environment

Bouaddi, M.; Taamouti, A.

Authors

M. Bouaddi



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.

Citation

Bouaddi, M., & Taamouti, A. (2013). Portfolio Selection in a Data-Rich Environment. Journal of Economic Dynamics and Control, 37(12), 2943-2962. https://doi.org/10.1016/j.jedc.2013.08.010

Journal Article Type Article
Publication Date Dec 1, 2013
Deposit Date Aug 28, 2014
Journal Journal of Economic Dynamics and Control
Print ISSN 0165-1889
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 37
Issue 12
Pages 2943-2962
DOI https://doi.org/10.1016/j.jedc.2013.08.010
Keywords Portfolio's weights modeling, Factor analysis, Principal components, Portfolio performance, Stock returns, Fama–French factors, Economic factors, VIX.
Public URL https://durham-repository.worktribe.com/output/1424475

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