Optimal portfolio diversification with a multi-chain regime-switching spillover GARCH model

Chien-Chiang Lee () and Hsiang-Tai Lee

Global Finance Journal, 2023, vol. 55, issue C

Abstract: A multi-chain regime-switching spillover GARCH (MCRSSG) model is proposed for optimal portfolio diversification. MCRSSG specifies the within-regime time-varying correlation via a multi-chain state-dependent spillover factor and quantifies the magnitude of volatility spillovers under different regime combinations. MCRSSG is applied to investigate the diversification benefit of precious metals, crude oil, and financial securities for the Korean stock market at a sector level. The empirical results reveal that the Dow Jones Islamic market US total return index provides the best diversification benefit and MCRSSG exhibits superior effectiveness for risk-adjusted return and reward-to-semivariance ratio.

Keywords: Multiple state variables; Regime switching; GARCH; Volatility spillover; Time-varying correlation (search for similar items in EconPapers)
JEL-codes: C32 C51 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:55:y:2023:i:c:s1044028323000030

DOI: 10.1016/j.gfj.2023.100808

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