IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Portfolio choice under local industry and country factors

  • Carlos Castro


Registered author(s):

    This article extends the parametric portfolio policy approach to optimizing portfolios with a large numbers of assets (Brandt et al. 2009 ). The proposed approach incorporates unobserved effects into the portfolio policy function. These effects measure the importance of unobserved heterogeneity for exploiting the difference between groups of assets. The source of the heterogeneity is local priced factors, such as industry or country. The statistical model allows testing the importance of such local factors in portfolio optimization. The results suggest that local effects or return heterogeneity associated with economic sectors or geographic factors is not as straightforward to exploit financially or as relevant as suggested by the extensive multivariate factor literature on the subject. Furthermore, trying to exploit industry effects rarely provides a gain over simple benchmarks, neither in-sample nor more importantly, out-of-sample. On the other hand, exploiting country effects does provide gains over the benchmark. However, these gains may be offset by the increasing cost of and risk inherent in such strategies. Finally, exploiting size, momentum, and liquidity anomalies in the cross-section of stocks provides strictly greater returns than the industry and country effects. Copyright Swiss Society for Financial Market Research 2010

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Springer in its journal Financial Markets and Portfolio Management.

    Volume (Year): 24 (2010)
    Issue (Month): 4 (December)
    Pages: 353-393

    in new window

    Handle: RePEc:kap:fmktpm:v:24:y:2010:i:4:p:353-393
    Contact details of provider: Web page:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Michael W. Brandt & Amit Goyal & Pedro Santa-Clara & Jonathan R. Stroud, 2005. "A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 831-873.
    2. Brodie, Joshua & Daubechies, Ingrid & De Mol, Christine & Giannone, Domenico, 2007. "Sparse and Stable Markowitz Portfolios," CEPR Discussion Papers 6474, C.E.P.R. Discussion Papers.
    3. Yacine Ait-Sahalia & Michael W. Brandt, 2001. "Variable Selection for Portfolio Choice," NBER Working Papers 8127, National Bureau of Economic Research, Inc.
    4. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    5. John Y. Campbell & Luis M. Viceira, 1996. "Consumption and Portfolio Decisions When Expected Returns are Time Varying," NBER Working Papers 5857, National Bureau of Economic Research, Inc.
    6. Chordia, Tarun & Subrahmanyam, Avanidhar & Anshuman, V. Ravi, 2001. "Trading activity and expected stock returns," Journal of Financial Economics, Elsevier, vol. 59(1), pages 3-32, January.
    7. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
    8. Simone Varotto, 2003. "Credit risk diversification: evidence from the eurobond market," Bank of England working papers 199, Bank of England.
    9. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
    10. Das, Sanjiv Ranjan & Uppal, Raman, 2002. "Systemic Risk and International Portfolio Choice," CEPR Discussion Papers 3305, C.E.P.R. Discussion Papers.
    11. Manolis Kavussanos & Stelios Marcoulis & Angelos Arkoulis, 2002. "Macroeconomic factors and international industry returns," Applied Financial Economics, Taylor & Francis Journals, vol. 12(12), pages 923-931.
    12. Hoevenaars, Roy P.M.M. & Molenaar, Roderick D.J. & Schotman, Peter C. & Steenkamp, Tom B.M., 2008. "Strategic asset allocation with liabilities: Beyond stocks and bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2939-2970, September.
    13. John Y. Campbell & Luis M. Viceira, 1999. "Consumption and Portfolio Decisions when Expected Returns are Time Varying," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 433-495.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:kap:fmktpm:v:24:y:2010:i:4:p:353-393. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)

    or (Christopher F. Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.