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Portfolio optimization in deformed time

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  • Malick Fall

    (CNRS, CREM – UMR6211)

Abstract

The expected return and covariance matrix are commonly calculated on a calendar time scale (e.g. daily or monthly data). In this article, we assess the relevance of calculating them on a new time scale derived from traded volume. In particular, we evaluate portfolio optimizations where returns evolve on a data-based rather than calendar time scale. We empirically test the impact of this change of scale by comparing the performance of two well-known portfolio optimizations in an out-of-sample framework. We find that this change leads to gains in both risk-adjusted return and risk. We also find that the degree of deviation from the normal distribution (and independence) of returns is greater with returns calculated in calendar time than in data-based time, which explains the outperformance of this new approach.

Suggested Citation

  • Malick Fall, 2025. "Portfolio optimization in deformed time," Journal of Asset Management, Palgrave Macmillan, vol. 26(2), pages 176-185, March.
    • Handle: RePEc:pal:assmgt:v:26:y:2025:i:2:d:10.1057_s41260-024-00378-9
    DOI: 10.1057/s41260-024-00378-9
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    References listed on IDEAS

    as
    1. Ghysels, E. & Jasiak, J., 1994. "Stochastic Volatility and time Deformation: an Application of trading Volume and Leverage Effects," Cahiers de recherche 9403, Universite de Montreal, Departement de sciences economiques.
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    More about this item

    Keywords

    Calendar time scale; Deformed time scale; Portfolio optimization;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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