Mean-variance portfolio optimization when means and covariances are unknown

Event Details
  • Date/Time:
    • Friday March 5, 2010
      12:00 pm - 1:00 pm
  • Location: ISyE Executive classroom
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Summary Sentence: Mean-variance portfolio optimization when means and covariances are unknown

Full Summary: Mean-variance portfolio optimization when means and covariances are unknown

TITLE: Mean-variance portfolio optimization when means and covariances are unknown

SPEAKER: Dr. Haipeng Xin

ABSTRACT:

Markowitz's celebrated mean-variance portfolio optimization theory assumes that the means and covariances of the underlying asset returns are known. In practice, they are unknown and have to be estimated from historical data. Plugging the estimates into the efficient frontier
that assumes known parameters has led to portfolios that may perform poorly and have counter-intuitive asset allocation weights; this has been referred to as the ``Markowitz optimization enigma.'' After reviewing different approaches in the literature to address these difficulties, we explain the root cause of the enigma and propose a new approach to resolve
it. Not only is the new approach shown to provide substantial improvements over previous methods, but it also allows flexible modeling to incorporate dynamic features and fundamental analysis of the training sample of historical data, as illustrated in simulation and empirical studies. This is a joint work with Tze Leung Lai (Stanford University) and Zehao Chen (Bosera Funds).

Short bio: Haipeng Xing graduated from the Department of Statistics at Stanford University at 2005, and then jointed the Department of Statistics at Columbia University. In 2008, he moved the Department of Applied Maths and Statistics at SUNY, Stony Brook. His research interests include financial econometrics and engineering, time series modeling and adaptive control, and change-point problems.

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H. Milton Stewart School of Industrial and Systems Engineering (ISYE)

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Status
  • Created By: Anita Race
  • Workflow Status: Published
  • Created On: Mar 4, 2010 - 7:15am
  • Last Updated: Oct 7, 2016 - 9:50pm