TY  - JOUR
AU  - Brandt,Michael W.
AU  - Santa-Clara,Pedro
AU  - Valkanov,Rossen
TI  - Parametric Portfolio Policies: Exploiting Characteristics in the Cross Section of Equity Returns
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10996
PY  - 2004
Y2  - December 2004
UR  - http://www.nber.org/papers/w10996
L1  - http://www.nber.org/papers/w10996.pdf
N1  - Author contact info:
Michael W. Brandt
Fuqua School of Business
Duke University
One Towerview Drive
Durham, NC  27708
Tel: 919/660-1948
Fax: 919/660-8038
E-Mail: mbrandt@duke.edu

Pedro Santa-Clara
Nova School of Business and Economics
Universidade Nova de Lisboa
Campus de Campolide
1099-032 Lisboa
PORTUGAL
Tel: +351-91-493-4313
E-Mail: pedro.santa-clara@anderson.ucla.edu

Rossen Valkanov
UC, San Diego
E-Mail: rvalkanov@ucsd.edu
AB  - We propose a novel approach to optimizing portfolios with large numbers of assets. We model directly the portfolio weight in each asset as a function of the asset's characteristics. The coefficients of this function are found by optimizing the investor's average utility of the portfolio's return over the sample period. Our approach is computationally simple, easily modified and extended, produces sensible portfolio weights, and offers robust performance in and out of sample. In contrast, the traditional approach of first modeling the joint distribution of returns and then solving for the corresponding optimal portfolio weights is not only difficult to implement for a large number of assets but also yields notoriously noisy and unstable results. Our approach also provides a new test of the portfolio choice implications of equilibrium asset pricing models. We present an empirical implementation for the universe of all stocks in the CRSP-Compustat dataset, exploiting the size, value, and momentum anomalies.
ER  -