 Robust portfolio selection with regime switching and asymmetric dependenceXiaoshan Su, Manying Bai and Yingwei Han Economic Modelling, 2021, vol. 99, issue C Abstract: This paper solves the portfolio selection problem with regime switching and asymmetric dependence in financial markets. Investors sustain substantial loss in times of crisis and expect to reduce their losses. Thus, we consider the uncertainty in hidden states of the economy and define worst-case conditional value-at-risk (WCVaR) to capture extreme portfolio loss during financial crisis. Then, we formulate the portfolio selection problem with WCVaR as the measure of risk. We conduct an empirical study using 13 global equity indices. The results show that for dynamic investments, or during financial crisis, our model outperforms other models that only consider a fixed dependence structure between assets. This is because our model can significantly reduce extreme portfolio loss in times of crisis by selecting the assets with small lower tail dependence. This new portfolio strategy can help risk-averse investors cope with financial crisis. Keywords: Robust portfolio decisions; Regime switching; Asymmetric dependence; Worst-case CVaR; R-vine copulas; Financial crisis (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:99:y:2021:i:c:s0264999321000754 DOI: 10.1016/j.econmod.2021.03.011 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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