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Asset Allocation Using Flexible Dynamic Correlation Models with Regime Switching
[journal article]
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 compo... view more
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 of the heteroskedastic behavior 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.... view less
Classification
Economic Statistics, Econometrics, Business Informatics
Basic Research, General Concepts and History of Economics
Method
theory formation
Free Keywords
Markov chain; Multivariate GARCH; Portfolio performance; Switching parameters; Volatility
Document language
English
Publication Year
2010
Page/Pages
p. 325-338
Journal
Quantitative Finance, 10 (2010) 3
DOI
https://doi.org/10.1080/14697680902856515
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)