Optimization Online


Multi-period portfolio optimization with alpha decay

Kartik Sivaramakrishnan (kksivara***at***axioma.com)
Vishv Jeet (vjeet***at***axioma.com)
Dieter Vandenbussche (dvandenbussche***at***axioma.com)

Abstract: The traditional Markowitz MVO approach is based on a single-period model. Single period models do not utilize any data or decisions beyond the rebalancing time horizon with the result that their policies are {\em myopic} in nature. For long-term investors, multi-period optimization offers the opportunity to make {\em wait-and-see} policy decisions by including approximate forecasts and long-term policy decisions beyond the rebalancing time horizon. We consider portfolio optimization with a composite alpha signal that is composed of a short-term and a long-term alpha signal. The short-term alpha better predicts returns at the end of the rebalancing period but it decays quickly, i.e., it has less memory of its previous values. On the other hand, the long-term alpha has less predictive power than the short-term alpha but it decays slowly. We develop a simple two stage multi-period model that incorporates this alpha model to construct the optimal portfolio at the end of the rebalancing period. We compare this model with the traditional single-period MVO model on a simulated example from Israelov \& Katz \cite{israelov_katz} and also a large strategy with realistic constraints and show that the multi-period model tends to generate portfolios that are likely to have a better realized performance.

Keywords: multi-period portfolio optimization, alpha-decay, "rolling-horizon" policies

Category 1: Applications -- OR and Management Sciences (Finance and Economics )

Citation: Axioma Research Report Number 55, February 2015, Also available at http://www.axioma.com/downloads/MPOWithAlphaDecay.pdf

Download: [PDF]

Entry Submitted: 02/20/2015
Entry Accepted: 02/20/2015
Entry Last Modified: 02/25/2015

Modify/Update this entry

  Visitors Authors More about us Links
  Subscribe, Unsubscribe
Digest Archive
Search, Browse the Repository


Coordinator's Board
Classification Scheme
Give us feedback
Optimization Journals, Sites, Societies
Mathematical Optimization Society