Tan, Vincent;
Firoozye, Nick;
Zohren, Stefan;
(2023)
Canonical Portfolios: Optimal Asset and Signal Combination.
arXiv: Ithaca, NY, USA.
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Abstract
We present a novel framework for analyzing the optimal asset and signal combination problem, which builds upon the dynamic portfolio selection problem of Brandt and Santa-Clara (2006) in two phases. First, we reformulate their original investment problem into a tractable vehicle, which admits a closed-form solution that scales to large dimensions by imposing a joint Gaussian structure on the asset returns and signals. Second, we recast the optimal portfolio of correlated assets and signals into a set of uncorrelated managed portfolios through the lens of Canonical Correlation Analysis of Hotelling (1936). The new investment environment of uncorrelated managed portfolios offers unique economic insights into the joint correlation structure of our optimal portfolio policy. We also operationalize our theoretical framework to bridge the gap between theory and practice and showcase the improved performance of our proposed method over natural competing benchmarks.
| Type: | Working / discussion paper |
|---|---|
| Title: | Canonical Portfolios: Optimal Asset and Signal Combination |
| Open access status: | An open access version is available from UCL Discovery |
| Publisher version: | https://doi.org/10.48550/arXiv.2202.10817 |
| Language: | English |
| Additional information: | Copyright © The Author 2023. This work is licensed under the terms of the Creative Commons Attribution 4.0 International (CC BY 4.0) Licence (https://creativecommons.org/licenses/by/4.0/). |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Computer Science |
| URI: | https://discovery-pp.ucl.ac.uk/id/eprint/10163895 |
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