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Combining equilibrium, resampling, and analysts' views in portfolio optimization

In: Portfolio and risk management for central banks and sovereign wealth funds

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  • José Luis Barros Fernandes

    (Central Bank of Brazil)

  • José Renato Haas Ornelas

    (Central Bank of Brazil)

  • Oscar Augusto Martínez Cusicanqui

    (Central Bank of Bolivia)

Abstract

This paper proposes the use of a portfolio optimization methodology which combines features of equilibrium models and investor’s views as in Black and Litterman (1992), and also deals with estimation risk as in Michaud (1998). In this way, our combined methodology is able to meet the needs of practitioners for stable and diversified portfolio allocations, while it is theoretically grounded on an equilibrium framework. We empirically test the methodology using a comprehensive sample of developed countries fixed income and equity indices, as well as sub-samples stratified by geographical region, time period, asset class and risk level. In general, our proposed combined methodology generates very competitive portfolios when compared to other methodologies, considering three evaluation dimensions: financial efficiency, diversification, and allocation stability. By generating financially efficient, stable, and diversified portfolio allocations, our methodology is suitable for long-term investors such as Central Banks and Sovereign Wealth Funds.

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This chapter was published in:

  • Bank for International Settlements, 2011. "Portfolio and risk management for central banks and sovereign wealth funds," BIS Papers, Bank for International Settlements, number 58, 8.
    This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 58-05.

    Handle: RePEc:bis:bisbpc:58-05

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    1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
    2. José Fajardo & Aquiles Farias, 2008. "Multivariate Affine Generalized Hyperbolic Distributions: An Empirical Investigation," IBMEC RJ Economics Discussion Papers 2008-01, Economics Research Group, IBMEC Business School - Rio de Janeiro.
    3. Jorion, Philippe, 1991. "Bayesian and CAPM estimators of the means: Implications for portfolio selection," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 717-727, June.
    4. Michael Wolf, 2006. "Resampling vs. Shrinkage for Benchmarked Managers," IEW - Working Papers 263, Institute for Empirical Research in Economics - University of Zurich.
    5. Farinelli, Simone & Ferreira, Manuel & Rossello, Damiano & Thoeny, Markus & Tibiletti, Luisa, 2008. "Beyond Sharpe ratio: Optimal asset allocation using different performance ratios," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2057-2063, October.
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    Cited by:
    1. Zhang, Zhichao & Chau, Frankie & Xie, Li, 2012. "Strategic Asset Allocation for Central Bank’s Management of Foreign Reserves: A new approach," MPRA Paper 43654, University Library of Munich, Germany.

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