On the usefulness of dynamically spilled risk: An optimal portfolio allocation based on cross-sector information contagion

Hideto Shigemoto and Takayuki Morimoto

Cogent Economics & Finance, 2023, vol. 11, issue 2, 2243200

Abstract: It is well known that the volatility spillover increases when a large economic shock occurs, and then the volatility spillover pattern in the market changes. Accordingly, many papers note that clarifying the time-varying pattern of volatility transmission in domestic and international markets is useful for investors and policymakers. This paper focuses on information contagion across various industrial sectors, investigates portfolio strategies based on the volatility spillovers, and aims to clarify whether an investment strategy based on volatility spillovers benefits investors. Regarding portfolio reallocation, as soon as we observe an increase or a decrease in the effect/timing of a volatility spillover, we obtain a smaller number of reallocations and a more informative portfolio. Our results compare our proposed method with periodic portfolios, for example, daily or annually, showing that our proposed method has larger returns and a greater Sharpe ratio than the others.

Date: 2023
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DOI: 10.1080/23322039.2023.2243200

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