Portfolio Allocation under Asymmetric Dependence in Asset Returns using Local Gaussian Correlations

Anders D. Sleire, B{\aa}rd St{\o}ve, H{\aa}kon Otneim, Geir Drage Berentsen, Dag Tj{\o}stheim and Sverre Hauso Haugen

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Abstract: It is well known that there are asymmetric dependence structures between financial returns. In this paper we use a new nonparametric measure of local dependence, the local Gaussian correlation, to improve portfolio allocation. We extend the classical mean-variance framework, and show that the portfolio optimization is straightforward using our new approach, only relying on a tuning parameter (the bandwidth). The new method is shown to outperform the equally weighted (1/N) portfolio and the classical Markowitz portfolio for monthly asset returns data.

Date: 2021-06
New Economics Papers: this item is included in nep-cwa and nep-fmk
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http://arxiv.org/pdf/2106.12425 Latest version (application/pdf)

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Journal Article: Portfolio allocation under asymmetric dependence in asset returns using local Gaussian correlations (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2106.12425

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