Parametric Portfolio Policies: Multi-period Policies Based on Power Utility

This research develops a method which constructs portfolio weights that maximize a power utility of an investor, while parametrizing these portfolio weights. This parametrizing is done with the use of mechanically managed portfolios. In the first place ‘conditional’ portfolios are used. These portfolios invest wealth in an asset proportional to the value of a state variable. Secondly, the concept of ‘timing’ portfolios is used. These portfolios invest wealth in an asset in one period and in the risk-free rate in all other periods. Since this method does not account for compounding, also a method that accounts for compounding is developed. To check whether the methods works well, they are compared to the nowadays ‘traditional’ method, which depends on an underlying econometric VAR-model. The methods that are developed in this research show good in-sample performance and robustness compared to the ‘traditional’ method, whereas out-of-sample they are outperformed by the ‘traditional’ method. The advantages of parametrizing the portfolio weights are more profound. However, the performance, especially out-of-sample, is dominated by the ‘traditional’ method.