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Portfolio selection in a multi-asset, incomplete-market economy

Yu-Min Lian and Jun-Home Chen

The Quarterly Review of Economics and Finance, 2019, vol. 71, issue C, 228-238

Abstract: In this study, we introduce multivariate compound Poisson jump-diffusion processes for the asset price with capturing both the comovement and the cojump in the oscillating market. Furthermore, we apply the Markowitz's mean-variance method to construct a portfolio and investigate the impacts of the cojump on portfolio selection. Empirical results show that the increasing of cojump intensity would increase the correlation between two assets and result in decreasing the effect of risk diversification through portfolio construction. As a consequence, when the major systematic risk occurs, such as the 2008 global financial crisis, the intensity of cojump would increase.

Keywords: Multivariate compound Poisson jump-diffusion process; Cojump; Markowitz’s mean-variance method; Portfolio selection (search for similar items in EconPapers)
JEL-codes: C13 C58 G01 G11 (search for similar items in EconPapers)
Date: 2019
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