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Cross-region and cross-sector asset allocation with regimes

Journal Article


Abstract


  • Cross-region and cross-sector asset allocation decisions are one of the most fundamental issues in international equity portfolio management. Equity returns exhibit higher volatilities and correlations, and lower expected returns, in bear markets compared to bull markets. However, static mean-variance analysis fails to capture this salient feature of equity returns. We accommodate the nonlinearity of returns using a regime switching model across both regions and sectors. The regime-dependent asset allocation potentially adds value to the traditional static mean-variance allocation. In addition, optimal allocation across sectors provide greater benefits compared to international diversification, which is characterized by higher returns, lower risks, lower correlations with the world market and a higher Sharpe ratio.

Authors


  •   Dou, Paul (external author)
  •   Gallagher, David R. (external author)
  •   Schneider, David (external author)
  •   Walter, Terry S.

Publication Date


  • 2014

Citation


  • Dou, P. Y., Gallagher, D. R., Schneider, D. & Walter, T. S. (2014). Cross-region and cross-sector asset allocation with regimes. Accounting and Finance, 54 (3), 809-846.

Scopus Eid


  • 2-s2.0-84927570303

Ro Metadata Url


  • http://ro.uow.edu.au/buspapers/1189

Number Of Pages


  • 37

Start Page


  • 809

End Page


  • 846

Volume


  • 54

Issue


  • 3

Abstract


  • Cross-region and cross-sector asset allocation decisions are one of the most fundamental issues in international equity portfolio management. Equity returns exhibit higher volatilities and correlations, and lower expected returns, in bear markets compared to bull markets. However, static mean-variance analysis fails to capture this salient feature of equity returns. We accommodate the nonlinearity of returns using a regime switching model across both regions and sectors. The regime-dependent asset allocation potentially adds value to the traditional static mean-variance allocation. In addition, optimal allocation across sectors provide greater benefits compared to international diversification, which is characterized by higher returns, lower risks, lower correlations with the world market and a higher Sharpe ratio.

Authors


  •   Dou, Paul (external author)
  •   Gallagher, David R. (external author)
  •   Schneider, David (external author)
  •   Walter, Terry S.

Publication Date


  • 2014

Citation


  • Dou, P. Y., Gallagher, D. R., Schneider, D. & Walter, T. S. (2014). Cross-region and cross-sector asset allocation with regimes. Accounting and Finance, 54 (3), 809-846.

Scopus Eid


  • 2-s2.0-84927570303

Ro Metadata Url


  • http://ro.uow.edu.au/buspapers/1189

Number Of Pages


  • 37

Start Page


  • 809

End Page


  • 846

Volume


  • 54

Issue


  • 3