We aim to design optimal portfolios acquiring the asset prices’ co-movements. This work uses cointegration methodology to devise two quantitative strategies: index tracking and long-short market neutral. Although the method is efficient, the tracking error isn’t certainly stationary, so the portfolio can get distant from the benchmark, requiring frequent re-balancements. The covariance matrices used to optimize are difficult to estimate and ad hoc methods often need to be applied to limit or smooth the mean-variance efficient allocations recommended by the model. The traditional models to optimize portfolios based on mean-variance analysis aim to determine the portfolio weights that minimize the variance for a certain return level.
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May 2023
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