Quantile regression as a tool for portfolio investment decisions during times of financial distress

D. E. Allen, R. J. Powell, A. K. Singh

Research output: Contribution to journalArticleResearchpeer-review

Abstract

The worldwide impact of the Global Financial Crisis (GFC) on stock markets, investors and fund managers has lead to a renewed interest in appropriate tools for robust risk management. Quantile regression is a powerful technique and deserves the interest of financial decision makers given its remarkable capabilities for capturing and explaining the behavior of financial return series across a distribution more effectively than ordinary least squares regression methods which are the standard tool. In this paper, we present quantile regression estimation as an attractive additional investment tool, which is more effective than Ordinary Least Squares (OLS) in analyzing information across the quantiles of a distribution. This translates into the more accurate calibration of asset pricing models and subsequent informational gains in portfolio formation. We present empirical evidence of the superior capabilities of quantile regression based techniques as applied across the quantiles of return distributions to derive information for portfolio formation. We show, via stocks in Dow Jones Industrial Index, that at times of financial shocks, such as the GFC, a portfolio of stocks formed using quantile regression in the context of the Fama–French three-factor model, performs better than the one formed using traditional OLS.
LanguageEnglish
Article number1150003
Number of pages19
JournalAnnals of Financial Economics
Volume6
Issue number1
DOIs
Publication statusPublished - Jun 2011
Externally publishedYes

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Quantile regression
Portfolio investment
Investment decision
Financial distress
Ordinary least squares
Quantile
Global financial crisis
Calibration
Fund managers
Decision maker
Asset pricing models
Fama-French three-factor model
Regression method
Financial returns
Investors
Financial shocks
Risk management
Return distribution
Financial decisions
Empirical evidence

Cite this

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Quantile regression as a tool for portfolio investment decisions during times of financial distress. / Allen, D. E.; Powell, R. J.; Singh, A. K.

In: Annals of Financial Economics, Vol. 6, No. 1, 1150003, 06.2011.

Research output: Contribution to journalArticleResearchpeer-review

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