TY - JOUR
T1 - Exploring the benefits of using stock characteristics in optimal portfolio strategies
AU - Fletcher, Jonathan
N1 - This is an Accepted Manuscript of an article published by Taylor & Francis in European Journal of Finance on 06/07/2015, available online: http://wwww.tandfonline.com/10.1080/1351847X.2015.1062036
PY - 2017/3/1
Y1 - 2017/3/1
N2 - 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 U.K. 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.
AB - 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 U.K. 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.
KW - characteristics
KW - modelling portfolio weights
KW - mean-variance strategies
UR - http://www.tandfonline.com/loi/rejf
U2 - 10.1080/1351847X.2015.1062036
DO - 10.1080/1351847X.2015.1062036
M3 - Article
SN - 1351-847X
VL - 23
SP - 192
EP - 210
JO - European Journal of Finance
JF - European Journal of Finance
IS - 3
ER -