Strategic Asset Allocation with Factor Models for Returns and GARCH Models for Volatilities

F. Herzog, G. Dondi, and H.P. Geering (Switzerland)


Stochastic Optimization, Optimal Control, Statistical and Probabilistic Modelling, Portfolio Management, and Fi nance.


This paper develops a discrete time portfolio optimization for multi asset and long-term investment objectives. The expected returns of the risky assets are modelled using a factor model based on stochastic Gaussian processes. A multivariable Generalized Autoregressive Conditional Het eroskedasticity (GARCH) model describes volatilities and correlations of the risky assets. A mean-variance objective function is maximized over terminal wealth steps into the future resulting in the decision rules for the optimal portfo lio choice. In order to solve this multi-period constrained optimization problem, a model predictive control approach is used to solve the optimal control problem.

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