Portfolio allocation under asymmetric dependence in asset returns using local Gaussian correlations

Anders D. Sleire, Bård Støve, Håkon Otneim, Geir Drage Berentsen, Dag Tjøstheim and Sverre Hauso Haugen

Finance Research Letters, 2022, vol. 46, issue PB

Abstract: It is well known that there are asymmetric dependence structures between financial returns. This paper describes a portfolio selection method rooted in the classical mean–variance framework that incorporates such asymmetric dependency structures using a nonparametric measure of local dependence, the local Gaussian correlation (LGC). It is shown that the portfolio optimization process for financial returns with asymmetric dependence structures is straightforward using local covariance matrices. The new method is shown to outperform the equally weighted (“1/N”) portfolio and the classical Markowitz portfolio when applied to historical data on six assets.

Keywords: Asymmetric dependence; Local Gaussian correlation; Mean–variance; Portfolio allocation (search for similar items in EconPapers)
Date: 2022
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Working Paper: Portfolio Allocation under Asymmetric Dependence in Asset Returns using Local Gaussian Correlations (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321004554

DOI: 10.1016/j.frl.2021.102475

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