Estimation Error Using High-Frequency Data on Optimal Portfolio Choice

Posted: 25 Oct 2017

See all articles by Nuria Alemany

Nuria Alemany

Jaume I University - Department of Finance and Accounting

Vicent Aragó

Jaume I University - Department of Finance and Accounting

Enrique Salvador

Universitat Jaume I - Department of Finance and Accounting

Date Written: October 25, 2017

Abstract

This article investigates the usefulness of high-frequency data in optimal portfolio choice using a comprehensive listing of major stock market indexes. We construct diversified portfolios considering monthly and high-frequency data in the modelling of volatility and compare the performance of these portfolios in terms of several out-of-sample metrics. The results underscore not only the positive performance of switching from data at lower frequencies to intraday data in the context of optimal asset allocation but also the capability of beating the equally weighted portfolio, even in the presence of transaction costs. Moreover, the results show that it is the reduction of the estimation error in estimating the variance-covariance matrix that offsets the increase in the transaction costs implied by these strategies.

Keywords: asset allocation, high-frequency data, optimization, transaction costs, estimation error

JEL Classification: G110, G150

Suggested Citation

Alemany, Nuria and Aragó, Vicent and Salvador, Enrique, Estimation Error Using High-Frequency Data on Optimal Portfolio Choice (October 25, 2017). Available at SSRN: https://ssrn.com/abstract=3058554

Nuria Alemany (Contact Author)

Jaume I University - Department of Finance and Accounting ( email )

Avda Sos Baynat S/N
Castello de la Plana, Castello 12071
Spain
+34‐964‐387151 (Phone)
+34964‐728565 (Fax)

HOME PAGE: http://www.uji.es/departaments/cofin/

Vicent Aragó

Jaume I University - Department of Finance and Accounting ( email )

Avda Sos Baynat s/N
Castellón, 12071
Spain

Enrique Salvador

Universitat Jaume I - Department of Finance and Accounting ( email )

Castellon
E-12071 Castello de la Plana, Castellón de la Plana 12071
Spain

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