Asymmetric Risk and International Portfolio Choice

Susan Thorp and George Milunovich

No 160, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: Empirical research shows that stock volatilities and correlations between markets rise more after negative shocks than after positive returns shocks of the same size. We measure the importance of these asymmetric effects for mean-variance investors holding portfolios of international equities who use dynamic conditional covariance forecasts to reweight their portfolios. Portfolio weights are computed using ex ante predictions from symmetric GARCH DCC and asymmetric GJR ADCC models, and a spectrum of expected returns. Data are weekly returns to equity price indices for the USA, Japan, UK and Australia. We find that the majority of realised portfolio standard deviations are less when we reweight using the asymmetric covariance model. Reductions in portfolio risk are significant according to Diebold-Mariano tests. Investors who are moderately risk averse and have longer rebalancing horizons benefit more from the asymmetric model than less risk averse, shorter-horizon investors, and would be prepared to pay up to 107 basis points annually to use it instead of the symmetric model. Benefits are greater for investors holding US equities.

Pages: 31 pages
Date: 2005-07-01
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.uts.edu.au/sites/default/files/qfr-archive-02/QFR-rp160.pdf (application/pdf)

Related works:
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:uts:rpaper:160

Access Statistics for this paper

More papers in Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney PO Box 123, Broadway, NSW 2007, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Duncan Ford ().