Mean-variance optimization under affine GARCH: A utility-based solution

doi:10.1016/j.frl.2023.104749

Mean-variance optimization under affine GARCH: A utility-based solution

2024-01-01

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Marcos Escobar‐Anel *

DOI：10.1016/j.frl.2023.104749

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Affine GARCH models have recently been explored in the context of portfolio optimization, although in a quite narrow setting in terms of utility functions and risk aversion. This work notably extends existing results, accommodating a richer class of objective functions for a large family of GARCH models. In particular, our approach allows for connections to constant proportion portfolio insurance (CPPI) and mean-variance portfolio strategies. We explore the latter numerically based on S&P 500 market data, revealing that a GARCH model clearly outperforms a homoscedastic variant in terms of the efficient frontier.

Keywords:

Dynamic portfolio optimization Affine GARCH models Mean-variance Efficient frontier HARA utility CPPI strategy

Mean-variance optimization under affine GARCH: A utility-based solution

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