Improving Portfolio Optimization by DCC And DECO GARCH: Evidence from Istanbul Stock Exchange
In this paper, the performance of global minimum variance (GMV) portfolios constructed by DCC and DECO-GARCH are compared to that of GMV portfolios constructed by sample covariance and constant correlation methods in terms of reduced volatility. Also, the performance of GMV portfolios are tested against that of equally weighted and cap weighted portfolios. Portfolios are constructed from the stocks listed in Istanbul Stock Exchange 30 index (hereafter, ISE-30). The results show that GMV portfolios constructed by DCC-GARCH outperformed the other portfolios. In addition, the performance of GMV portfolios estimated by DCC and DECO-GARCH methods are improved by extending calibration period from three years to four years and lowering rolling window term from one week to one day, while the performances of other GMV portfolios decrease. It shows the effect of time varying variance and dynamic correlations on portfolio optimization at Turkish stock market.
|Date of creation:||01 Dec 2010|
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