Asset Allocation in Transition Economies

Michael Rockinger () and Eric Jondeau

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Abstract: Designing an investment strategy in transition economies is a difficult task, because stock markets opened through time, time series are short, and there is little guidance how to obtain expected returns and covariance matrices necessary for mean-variance asset allocation. Moments of market returns can be expected to be time varying as structural changes occur in nascent market economies. We develop an ad-hoc optimal asset-allocation strategy with a flavor of Bayesian learning adapted to these various characteristics. Since an extreme event often heralds a new state of the economy, we re-initialize learning when unlikely returns materialize. By considering a Cornell benchmark, we show the usefulness of our strategy for certain types of re-initializations. Our model can also be used in situations when new industries emerge or when companies are subject toimportant restructuring.

Keywords: Emerging markets; mean-variance allocation; sequential Bayesian learning; structural breaks (search for similar items in EconPapers)
Date: 2002-10-01
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Published in 2002

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