Combining different models

16 Aug 2017

Portfolio selection is one of the most important areas of modern finance, both theoretically and practically. Reliance on a single model is fraught with difficulties, so attempting to combine the strengths of different models is attractive; see, for example, Geweke and Amisano (J Econom 164(1):130–141, 2011) and the many references therein. This paper contributes to the model combination literature, but with a difference: the models we consider here are making statements about different sets of assets. There appear to be no studies making this structural assumption, which completely changes the nature of the problem. This paper offers suggestions for principles of model combination in this situation, characterizes the solution in the case of multivariate Gaussian distributions, and provides a small illustrative example.