Movements and co-movements across the European asset classes: portfolio allocations and policy implications

Michael Donadelli, Lorenzo Prosperi, Federica Romei () and Federico Silvestri ()
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Federica Romei: LUISS Guido Carli
Federico Silvestri: Allianz Investment Management Spa

Rivista Bancaria - Minerva Bancaria, 2013, issue 1-2

Abstract: This paper studies the impact of changes in the dynamics ofthe correlation coefficients between asset returns on portfolio choices. Using weekly data from February 2002 to October 2011 on four different European asset classes, we obtain three main results. Firstly, we show that the 2007-2009 global demand collapse and the European sovereign debt crisis have largely affected the dynamics of the correlation coefficients between European asset returns. Reductio ad absurdum, in a post-Lehman scenario, we observe that diversification can be implemented intra-class. Secondly, in a dynamic ex-post and ex-ante mean-variance optimization (MVO) framework, we show that “stressed sovereign assets” (e.g. Greek and Italian Government Bonds) are less desirable. Thirdly, in the context of consumption-based asset pricing, we find that the resulting ex-post and ex-ante dynamic allocation reflects investors’ insurance motive. We conclude by arguing that the resulting allocation might have strong implications for policymakers.

Keywords: dynamic correlation; mean-variance optimization; sovereign debt crisis; stressed assets (search for similar items in EconPapers)
JEL-codes: C13 E44 G12 G15 (search for similar items in EconPapers)
Date: 2013
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