# 【AP】Multivariate GARCH models and the BL approach for tracking error constrained portfolios

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Multivariate GARCH models and the BL approach for tracking error constrained portfolios

# Pub Date

2008 vol 10. No. 4 Global Business and Economics Review

# Abstract

In a typical tatical asset allocation setup, managers generally make their choices with the aim of beating a benchmark portfolio. In this context, the pure markowitz (1959) strategy does not take two aspects into account: asset returns often show changes in volatility and manager's decisions depend on private information.(指出经典MV模型存在的两个缺陷: 设置了资产收益率的波动性为常数以及模型为静态决策)
This paper provides an empirical model for large-scale tactical asset allocation with multivariate GARCH estimates, given a tracking error constraint. Moreover, the Black and Litterman (1991) approach makes it possible to tactically manage the selected portfolio by combining information taken from the time-varying volatility model with some personal views about asset returns.

# Introduction

The aim of this work is to show how it is possible to make a portfolio optimization in the presence of a large number of assets by combining two different types of information:

# Portfolio frontiers

## Constant TE frontier

max ⁡ ( ω − q ) ′ R s . t . { ( ω − q ) ′ 1 = 0 ( ω − q ) ′ Ω ( ω − q ) = T E ω ′ Ω ω = σ p 2 \max (\omega-q)'R\\ s.t. \begin{cases} (\omega-q)'\mathbf{1}=0\\ (\omega-q)'\Omega(\omega-q)=TE\\ \omega'\Omega\omega=\sigma_p^2 \end{cases}

# The BL model

BL模型下得到的后验超额均值向量及观点不确定矩阵如下

The aim of BL model is to insert uncertain personal views into the equilibrium returns to modify the portfolio weights in the direction of manager’s hypothesised scenarios.

they find that information depends on how the different distributions impact the optimal portfolio. This is true for the marginal distributions of expected returns.

Meucci(2005) solves this problem by using a copula and opinion-pooling methodology to determine the posterior market distribution. Moreover, he claims that his extension to the BL model be applied to any market distirbution and non-normal views.

# The model

## data

DJ Euro Stoxx 50作为基准投资组合

## the time-varying volatility model

TAA策略中需要使用时变的波动率模型估计和预测returnscovariance. 关于在TAA中使用波动率模型的理由论述如下

The use of this approach yields two benefits: first modelling heteroskedasticity explicitly leads to the increased efficiency in the estimation of the parameters of the conditional mean. Moreover, forecasting the covariance matrix for different time horizons would be useful for the TAA, especially because the forecast of the conditional covariances is likely to be the main object interest.

{ y t = μ + Π y t − 1 + ε t E ( ε t ∣ F t − 1 ) = 0 E ( ε t ε t ′ ∣ F t ) = Ω t Ω t = D t − 1 / 2 R t D t − 1 / 2 (8) \begin{cases} y_t=\mu+\Pi y_{t-1}+\varepsilon_t\\ E(\varepsilon_t\mid\mathcal{F}_{t-1})=0\\ E(\varepsilon_t\varepsilon_t'\mid \mathcal{F}_t)=\Omega_t\\ \Omega_t=D_t^{-1/2}R_tD_t^{-1/2} \end{cases}\tag{8}
FDCC模型的推导分为两个步骤：

1. 估计出时间序列的条件均值和条件方差
2. 推断动态相关性矩阵(dynamic correlations matrix)

y i t = μ i + π i y t − 1 + ε i , t y_{it}=\mu_i+\pi_iy_{t-1}+\varepsilon_{i,t}

h i , t = ω + α ε i , t − 1 2 + β h i , t − 1 h_{i,t}=\omega+\alpha\varepsilon_{i, t-1}^2+\beta h_{i, t-1}

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