Asset Allocation Using Flexible Dynamic Correlation Models with Regime Switching

Edoardo Otranto

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: The asset allocation decision is often considered as a trade-off between maximizing the expected return of a portfolio and minimizing the portfolio risk. The riskiness is evaluated in terms of variance of the portfolio return, so that it is fundamental to consider correctly the variance of its components and their correlations. The evidence of the heteroskedastic behavior of the returns and the time-varying relationships among the portfolio components have recently shifted attention to the multivariate GARCH models with time varying correlation. In this work we insert a particular Markov Switching dynamics in some Dynamic Correlation models to consider the abrupt changes in correlations affecting the assets in different ways. This class of models is very general and provides several specifications, constraining some coefficients. The models are applied to solve a sectorial asset allocation problem and are compared with alternative models.

Keywords: markov chain; multivariate garch; portfolio performance; switching parameters (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-fmk and nep-ore
References: Add references at CitEc
Citations:

Downloads: (external link)
https://crenos.unica.it/crenos/node/274
https://crenos.unica.it/crenos/sites/default/files/wp/08-10.pdf (application/pdf)

Related works:
Journal Article: Asset allocation using flexible dynamic correlation models with regime switching (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:200810

Access Statistics for this paper

More papers in Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia Contact information at EDIRC.
Bibliographic data for series maintained by CRENoS ().