The role of correlation dynamics in sector allocation

Elena Kalotychou, Sotiris K. Staikouras and Gang Zhao

Journal of Banking & Finance, 2014, vol. 48, issue C, 1-12

Abstract: This paper assesses the economic value of modeling conditional correlations for mean–variance portfolio optimization. Using sector returns in three major markets we show that the predictability of models describing empirical regularities in correlations such as time-variation, asymmetry and structural breaks leads to significant performance gains over the static covariance strategy. Investors would be willing to pay a fee of up to 983 basis points to switch from the static to the dynamic correlation portfolio and about 100 basis points more for capturing asymmetries and shifts in correlations. The gains are robust to the crisis, transaction costs and are most pronounced for monthly rebalancing.

Keywords: Correlation timing; Asymmetry; Structural break; Portfolio performance; Transaction costs (search for similar items in EconPapers)
JEL-codes: C32 C52 C53 F21 G11 G15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:48:y:2014:i:c:p:1-12

DOI: 10.1016/j.jbankfin.2014.06.025

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