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Modeling manager confidence in forecasted excess returns under active portfolio management

Author

Listed:
  • John Birge
  • Luis Chavez-Bedoya

    (Universidad Esan)

Abstract

In the framework of active portfolio management, we propose a novel methodology to incorporate the relative confidence given to the distribution of consensus excess returns with respect to the forecasted one. This methodology uses a particular case of the generalized hyperbolic distribution, and provides an intuitive and simple form to incorporate distribution uncertainty since closed-form expressions for the optimal portfolio weights are available for the unconstrained optimization problem.

Suggested Citation

  • John Birge & Luis Chavez-Bedoya, 2014. "Modeling manager confidence in forecasted excess returns under active portfolio management," Journal of Asset Management, Palgrave Macmillan, vol. 15(6), pages 353-365, December.
    • Handle: RePEc:pal:assmgt:v:15:y:2014:i:6:d:10.1057_jam.2014.36
    DOI: 10.1057/jam.2014.36
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    References listed on IDEAS

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    1. Zhongzhi (Lawrence) He, 2007. "Incorporating alpha uncertainty into portfolio decisions: A Bayesian revisit of the Treynor–Black model," Journal of Asset Management, Palgrave Macmillan, vol. 8(3), pages 161-175, September.
    2. Sebastián Ceria & Robert A Stubbs, 2006. "Incorporating estimation errors into portfolio selection: Robust portfolio construction," Journal of Asset Management, Palgrave Macmillan, vol. 7(2), pages 109-127, July.
    3. Treynor, Jack L & Black, Fischer, 1973. "How to Use Security Analysis to Improve Portfolio Selection," The Journal of Business, University of Chicago Press, vol. 46(1), pages 66-86, January.
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