Meteor showers and global asset allocation

Rashad Ahmed, Mohammad S. Hasan and Jahangir Sultan

The European Journal of Finance, 2020, vol. 26, issue 17, 1703-1724

Abstract: Cross-market linkages allow transmission of shocks among markets. Previous measures of such spillovers are based on broader stock market indexes, which cannot identify the industries that are the principal drivers of spillovers and the industries that are most exposed to the spillovers. Using investable equity indexes, we show that basic materials, financials, industrials, technologies, and telecommunication equity sectors were the primary exporters of volatility from the U.S. and that the magnitude of the spillovers increased primarily during and post-2008 financial crisis. There is evidence that Canada was most vulnerable to spillovers, while China’s exposure was the lowest among the countries in the sample. Based on the minimum variance portfolio optimization, we find that investing in foreign industries with low exposure to spillovers from the U.S. generates high Sharpe ratios for U.S. portfolio managers, especially during the financial crisis.

Date: 2020
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DOI: 10.1080/1351847X.2020.1774406

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