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Dynamic Portfolio Selection by Augmenting the Asset Space

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  • MICHAEL W. BRANDT
  • PEDRO SANTA‐CLARA

Abstract

We present a novel approach to dynamic portfolio selection that is as easy to implement as the static Markowitz paradigm. We expand the set of assets to include mechanically managed portfolios and optimize statically in this extended asset space. We consider “conditional” portfolios, which invest in each asset an amount proportional to conditioning variables, and “timing” portfolios, which invest in each asset for a single period and in the risk‐free asset for all other periods. The static choice of these managed portfolios represents a dynamic strategy that closely approximates the optimal dynamic strategy for horizons up to 5 years.

Suggested Citation

  • Michael W. Brandt & Pedro Santa‐Clara, 2006. "Dynamic Portfolio Selection by Augmenting the Asset Space," Journal of Finance, American Finance Association, vol. 61(5), pages 2187-2217, October.
    • Handle: RePEc:bla:jfinan:v:61:y:2006:i:5:p:2187-2217
    DOI: 10.1111/j.1540-6261.2006.01055.x
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    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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