 Asset allocation using flexible dynamic correlation models with regime switchingQuantitative Finance, 2010, vol. 10, issue 3, 325-338 Abstract: The asset allocation decision is often considered as a trade-off between maximizing the expected return of a portfolio and minimizing the portfolio risk. The riskiness is evaluated in terms of variance of the portfolio return, so that it is fundamental to consider correctly the variance of its components and their correlations. The evidence for the heteroskedastic behaviour of the returns and the time-varying relationships among the portfolio components have recently shifted attention to the multivariate GARCH models with time varying correlation. In this work we insert a particular Markov Switching dynamics in some Dynamic Correlation models to consider the abrupt changes in correlations affecting the assets in different ways. This class of models is very general and provides several specifications, constraining some coefficients. The models are applied to solve a sectorial asset allocation problem and are compared with alternative models. Keywords: Markov chain; Multivariate GARCH; Portfolio performance; Switching parameters; Volatility (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:10:y:2010:i:3:p:325-338 Ordering information: This journal article can be ordered from DOI: 10.1080/14697680902856515 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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