Combining different models

Chris Rogers (University of Cambridge, UK)

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. This talk discusses model combination, 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 shows how a practical implementation can be done.