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Uncertainty times for portfolio selection at financial market

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  • Oliveira, André Barbosa
  • Pereira, Pedro L. Valls

Abstract

The financial market presents non-linearities for the behavior of stock returns for periods of high and low market. This article studies portfolios whose variance-covariance matrices are estimates using a multivariate model with regime change. Investment strategies for portfolios are presented in the presence of uncertainty as to the high or low state of the stock market. The portfolios were applied to the main Ibovespa shares. The proposed portfolios offered better performance for the period analyzed.

Suggested Citation

  • Oliveira, André Barbosa & Pereira, Pedro L. Valls, 2018. "Uncertainty times for portfolio selection at financial market," Textos para discussão 473, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  • Handle: RePEc:fgv:eesptd:473
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    References listed on IDEAS

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    1. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
    2. Michaud, Richard O. & Michaud, Robert O., 2008. "Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation," OUP Catalogue, Oxford University Press, edition 2, number 9780195331912.
    3. Louis K.C. Chan & Jason Karceski & Josef Lakonishok, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," NBER Working Papers 7039, National Bureau of Economic Research, Inc.
    4. Pereira, Pedro L. Valls & Hotta, Luiz K. & Souza, Luiz Alvares R. de & Almeida, Nuno Miguel C. G. de, 1999. "Alternative Models To Extract Asset Volatility: A Comparative Study," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 19(1), May.
    5. Franc Klaassen, 2002. "Improving GARCH volatility forecasts with regime-switching GARCH," Empirical Economics, Springer, vol. 27(2), pages 363-394.
    6. Victor DeMiguel & Francisco J. Nogales, 2009. "Portfolio Selection with Robust Estimation," Operations Research, INFORMS, vol. 57(3), pages 560-577, June.
    7. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    8. Fok, Dennis & van Dijk, Dick & Franses, Philip Hans, 2005. "Forecasting aggregates using panels of nonlinear time series," International Journal of Forecasting, Elsevier, vol. 21(4), pages 785-794.
    9. Silva Filho, Osvaldo Candido da & Ziegelmann, Flavio Augusto & Dueker, Michael J., 2012. "Modeling dependence dynamics through copulas with regime switching," Insurance: Mathematics and Economics, Elsevier, vol. 50(3), pages 346-356.
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    11. Chan, Louis K C & Karceski, Jason & Lakonishok, Josef, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 937-974.
    12. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, January.
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