Asset Classes and Portfolio Diversification: Evidence from a Stochastic Spanning Approach

Duc Khuong Nguyen, Nikolas Topaloglou and Thomas Walther

MPRA Paper from University Library of Munich, Germany

Abstract: We propose a stochastic spanning approach to assess whether a traditional portfolio of stocks and bonds spans augmented portfolios including commodities, foreign exchange, and real estate. We empirically show that in all seven portfolio combinations, the augmented portfolio is not spanned by the traditional one. Our results are further confirmed by both parametric and non-parametric tests in an out-of-sample setting. Therefore, traditional investors can generally benefit in terms of higher Sharpe ratios from augmenting their portfolio with alternative asset classes. Additional analysis demonstrates that diversification benefits can be explained by the current state of the U.S. economy and stock markets.

Keywords: Stochastic Dominance; Stochastic Spanning; Commodities; FX; Real Estate; Diversification (search for similar items in EconPapers)
JEL-codes: C1 C4 C6 E32 G10 G11 G12 G15 (search for similar items in EconPapers)
Date: 2020-10-30
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/105028/1/MPRA_paper_105028.pdf revised version (application/pdf)

Related works:
Working Paper: Asset Classes and Portfolio Diversification: Evidence from a Stochastic Spanning Approach (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:103870

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