Asset allocation by penalized least squares
AbstractThis paper shows how the problem of mean-downside risk portfolio allocation can be cast in terms of penalized least squares (PLS). The penalty is given by a power function of the returns below a certain threshold. We derive the asymptotic properties of the PLS estimator, allowing for possible nonlinearities and misspecification of the model. We illustrate the usefulness of this new class of estimators with two empirical applications. First, we estimate an autoregressive model, in the spirit of the GARCH literature. Second, we suggest a simple strategy to derive the optimal portfolio weights associated to a mean-downside risk model. JEL Classification: C14, C22, G11
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Date of creation: Feb 2007
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Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-10 (All new papers)
- NEP-RMG-2007-02-10 (Risk Management)
- NEP-UPT-2007-02-10 (Utility Models & Prospect Theory)
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