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Exploring the benefits of using stock characteristics in optimal portfolio strategies

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  • Jonathan Fletcher

Abstract

I examine the benefits of using stock characteristics to model optimal portfolio weights in stock selection strategies using the characteristic portfolio approach of Brandt, Santa-Clara, and Valkanov. [2009. “Parametric Portfolio Policies: Exploiting Characteristics in the Cross-section of Equity Returns.” Review of Financial Studies 22: 3411–3447]. I find that there are significant out-of-sample performance benefits in using characteristics in stock selection strategies even after adjusting for trading costs, when investors can invest in the largest 350 UK stocks. Imposing short selling restrictions on the characteristic portfolio strategy leads to more consistent performance. The performance benefits are concentrated in the earlier part of the sample period and have disappeared in recent years. I find that there no performance benefits in using stock characteristics when using random subsets of the largest 350 stocks.

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  • Jonathan Fletcher, 2017. "Exploring the benefits of using stock characteristics in optimal portfolio strategies," The European Journal of Finance, Taylor & Francis Journals, vol. 23(3), pages 192-210, February.
    • Handle: RePEc:taf:eurjfi:v:23:y:2017:i:3:p:192-210
    DOI: 10.1080/1351847X.2015.1062036
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    Cited by:

    1. Marc S. Paolella, 2017. "The Univariate Collapsing Method for Portfolio Optimization," Econometrics, MDPI, vol. 5(2), pages 1-33, May.
    2. Mengting Li & Qifa Xu & Cuixia Jiang & Qinna Zhao, 2023. "The role of tail network topological characteristic in portfolio selection: A TNA‐PMC model," International Review of Finance, International Review of Finance Ltd., vol. 23(1), pages 37-57, March.

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