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The Journal of Portfolio Management

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Optimal Beats Naive Diversification: Asset Allocation Using High-Frequency Data

Nuria Alemany, Vicent Aragó and Enrique Salvador
The Journal of Portfolio Management November 2020, jpm.2020.1.185; DOI: https://doi.org/10.3905/jpm.2020.1.185
Nuria Alemany
is a lecturer in finance in the Faculty of Law and Economics at University Jaume I in Castellón, Spain
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Vicent Aragó
is an associate professor in the Faculty of Law and Economics at University Jaume I in Castellón, Spain
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Enrique Salvador
is a lecturer in finance in the Faculty of Law and Economics at University Jaume I in Castellón, Spain
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Abstract

This article evaluates the usefulness of high-frequency data in optimal portfolio choice. The authors use a comprehensive list of major stock indexes and different frequencies of observations. Furthermore, they consider the impact of economic cycles, microstructure noise, and seasonality on performance. Their results show the ability of high-frequency data–based strategies to beat both monthly and daily based strategies and the benchmark equally weighted portfolio, even in presence of transaction costs. The authors also find that the outperformance arises from the reduction in the estimation error of the covariance matrix, which offsets the increase in transaction costs.

TOPICS: Performance measurement, portfolio construction, portfolio theory

Key Findings

  • • The authors evaluate the usefulness of high-frequency data in optimal portfolio choice.

  • • They employ several stock indexes and different frequencies of observations.

  • • The authors consider the impact of economic cycles, microstructure noise, and intraday seasonality on performance.

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Optimal Beats Naive Diversification: Asset Allocation Using High-Frequency Data
Nuria Alemany, Vicent Aragó, Enrique Salvador
The Journal of Portfolio Management Sep 2020, jpm.2020.1.185; DOI: 10.3905/jpm.2020.1.185

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Optimal Beats Naive Diversification: Asset Allocation Using High-Frequency Data
Nuria Alemany, Vicent Aragó, Enrique Salvador
The Journal of Portfolio Management Sep 2020, jpm.2020.1.185; DOI: 10.3905/jpm.2020.1.185
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