A Study on Dynamic Asset Allocation Strategy for Optimal Portfolio Selection

Hojin Lee ()
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Hojin Lee: Myongji University

East Asian Economic Review, 2021, vol. 25, issue 3, 310-336

Abstract: We use iterative numerical procedures combined with analytical methods due to Rapach and Wohar (2009) to solve for the dynamic asset allocation strategy for optimal portfolio demand. We compare different optimal portfolio demands when investors in each country have different access to overseas and domestic investment opportunities. The optimal dynamic asset allocation strategy without foreign investment opportunities leads domestic investors in Korea, Hong Kong, and Singapore to allocate more funds to domestic bonds than to domestic stocks. However, the U.S. investors allocate more wealth to domestic stocks than to domestic bonds. Investors in all countries short bills at a low level of risk aversion. Next, we investigate dynamic asset allocation strategy when domestic investors in Korea have access to foreign markets. The optimal portfolio demand leads investors in Korea to allocate most resources to domestic bonds and foreign stocks. On the other hand, the portfolio weights on foreign bonds and domestic stocks are relatively low. We also analyze dynamic asset allocation strategy for the investors in the U.S., Hong Kong, and Singapore when they have access to the Korean markets as overseas investment opportunities. Compared to the results when the investors only have access to domestic markets, the investors in the U.S. and Singapore increase the portfolio weights on domestic stocks in spite of the overseas investment opportunities in the Korean markets. The investors in the U.S., Hong Kong, and Singapore short domestic bills to invest more than initial funds in risky assets with a varying degree of relative risk aversion coefficients without exception.

Keywords: Dynamic Asset Allocation; Optimal Portfolio; Intertemporal Hedging Demand; Myopic Demand (search for similar items in EconPapers)
JEL-codes: C13 C14 C15 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:ris:eaerev:0399

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