Parametric portfolio policies: An application for a global tactical asset allocation model

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

Despite the extensive literature on the predictability of asset class returns and its economic significance, it is common for many asset managers to implement portfolio models built around active management within an asset class, while generally having passive allocations to each asset class based on the risk profile of the investor. We can exploit some of the predictability by using information on economic factors and momentum that explain broad asset class moves through a parametric portfolio approach introduced by Brandt, Santa-Clara and Valkanov (2009). I obtain significant improvements over fixed allocations and Markowitz optimal portfolios, even when applying significant restrictions.