Title: Do better return density forecasts lead to economic gains in portfolio allocation?
Authors: Chenxing Li - McMaster University (Canada) [presenting]
Abstract: This paper investigates the relationship between statistical improvements in density forecasts of returns and actual economic gains in portfolio allocation for a risk-averse investor. To aid this investigation, this paper proposes a new multivariate Bayesian semiparametric model that has better out-of-sample density forecasts than benchmark models. Results show that this more sophisticated econometric model does provide positive economic gains whether the investors utility is CRRA, CARA or quadratic. The economic gain diminishes when the investor is more risk-averse because she is moving away from risky investment positions.