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Dangxing Chen, UC Berkeley: Nonparametric prediction of portfolio return volatility and its extension to the longer horizon

February 18 @ 11:00 am - 12:30 pm

ABSTRACT: Medium-horizon portfolio volatility predictions are of significant value to long-term investors, such as Defined Benefit pension plans, insurance companies, sovereign wealth funds, endowments, and individual owners of Defined Contribution pension plans. In this paper, we propose a simple, accurate, and efficient nonparametric method predict the conditional variance of log return (CVLR) at an arbitrary horizon. At a relatively short horizon, we introduce a regression framework for the stochastic volatility model. Beyond the short horizon, we study the properties of the dispersion function, which is defined as the ratio of the CVLR function and its converged stationary value, in the weak interaction case (e.g. for portfolios of large stocks). We provide tight upper and lower bounds of the CVLR function at longer horizons based on the results from the regression and analytical properties of the dispersion function. Empirical results suggest that our method is very promising. Finally, we provide a mean-field single-factor framework, validated by varied empirical evidence, for the optimization of portfolios defined by weights on multiple country indices.

Details

Date:
February 18
Time:
11:00 am - 12:30 pm
Event Category:

Venue

1011 Evans Hall
1011 Evans Hall
Berkeley, CA 94720 United States