Domestic portfolio choice amid political instability

Chen, Shu-Hsien, Hua, Ming-Shu and Richard Stuetz

Applied Financial Economics Letters, 2006, vol. 2, issue 1, pages 37-41

Abstract: Political instability causes jump-risk volatility in domestic risky asset returns. The effects of outcome risk on portfolio decisions are inherently linked to their impact on the conditional moments of the asset return. Although rare events are stochastic and move discontinuously, major events often trigger abrupt changes in stock prices and even the portfolio choice in the equity markets. It has been determined that domestic portfolio choice can benefit from the estimated parameters of the diffusion-jump process more than from the traditional lognormal model. An alternative solution, other than the closed-form solution of the past, is also presented in this letter.

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