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On the Gains of Using High Frequency Data in Portfolio Selection

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  • Rui Pedro Brito
  • Helder Sebastião
  • Pedro Godinho

Abstract

This paper analyzes empirically the performance gains of using high frequency data in portfolio selection. Assuming Constant Relative Risk Aversion (CRRA) preferences, with different relative risk aversion levels, we compare low and high frequency portfolios within mean-variance, mean-variance-skewness and mean-variance-skewness-kurtosis frameworks. Using data on fourteen stocks of the Euronext Paris, from January 1999 to December 2005, we conclude that the high frequency portfolios outperform the low frequency portfolios for every out-of-sample measure, irrespectively to the relative risk aversion coefficient considered. The empirical results also suggest that for moderate relative risk aversion the best performance is always achieved through the jointly use of the realized variance, skewness and kurtosis. This claim is reinforced when trading costs are taken into account. JEL Codes - C55; C61; G11

Suggested Citation

  • Rui Pedro Brito & Helder Sebastião & Pedro Godinho, 2018. "On the Gains of Using High Frequency Data in Portfolio Selection," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 65(4), pages 365-383, December.
    • Handle: RePEc:aic:saebjn:v:65:y:2018:i:4:p:365-383:n:124
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    References listed on IDEAS

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    1. repec:hal:journl:peer-00815564 is not listed on IDEAS
    2. R. P. Brito & H. Sebastião & P. Godinho, 2017. "Portfolio choice with high frequency data: CRRA preferences and the liquidity effect," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 16(2), pages 65-86, August.
    3. Amaya, Diego & Christoffersen, Peter & Jacobs, Kris & Vasquez, Aurelio, 2015. "Does realized skewness predict the cross-section of equity returns?," Journal of Financial Economics, Elsevier, vol. 118(1), pages 135-167.
    4. Barndorff-Nielsen, Ole E. & Hansen, Peter Reinhard & Lunde, Asger & Shephard, Neil, 2011. "Multivariate realised kernels: Consistent positive semi-definite estimators of the covariation of equity prices with noise and non-synchronous trading," Journal of Econometrics, Elsevier, vol. 162(2), pages 149-169, June.
    5. Lionel Martellini & Volker Ziemann, 2010. "Improved Estimates of Higher-Order Comoments and Implications for Portfolio Selection," The Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1467-1502, April.
    6. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December.
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    More about this item

    Keywords

    Portfolio selection; utility maximization criteria; higher moments; high frequency data;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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