Quantitative finance scholars are creating better optimizers.
Robert Engle, at New York University's Stern School of Business, and Michael Brandt, at Duke University's Fuqua School of Business, proposed a new quantitative model that would give investors a blueprint on how to rebalance their portfolios monthly to produce higher risk-adjusted returns without increasing risk. It would also give investors a simple way of optimizing their portfolios. Messrs. Engle and Brandt presented their findings at a recent conference hosted by The Chicago Quantitative Alliance, a money management industry group dedicated to quantitative research.
Most pension plans face funding shortfalls. As a result, many are demanding better returns with less risk from their money managers.
Mr. Engle, who won the Nobel Memorial Prize in Economic Sciences in 2003 for creating his Autoregressive Conditional Heteroskedasticity, or ARCH, model, proposed an extension to the ARCH model that he calls dynamic conditional correlation. This new model would allow an investor to forecast correlation and covariance (the measure of the degree to which two volatile asset classes are associated), and to build a rebalancing strategy that slightly increases risk-adjusted returns. At least one money management executive labeled DCC a breakthrough.