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Symmetric versus asymmetric conditional covariance forecasts : does it pay to switch?

Please use this identifier to cite or link to this item: http://hdl.handle.net/1959.14/75085

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Title: Symmetric versus asymmetric conditional covariance forecasts : does it pay to switch?
Related: Journal of financial research, Vol. 30, Issue 3, p.355-377
DOI: 10.1111/j.1475-6803.2007.00218.x
Publisher: Blackwell Publishers
Date: 2007
FoR/RFCD Code(s): 150200 Banking, Finance and Investment
Author/Creator: Thorp, Susan
Author/Creator: Milunovich, George
Description: Volatilities and correlations for equity markets rise more after negative returns shocks than after positive shocks. Allowing for these asymmetries in covariance forecasts decreases mean-variance portfolio risk and improves investor welfare. We compute optimal weights for international equity portfolios using predictions from asymmetric covariance forecasting models and a spectrum of expected returns. Investors who are moderately risk averse, have longer rebalancing horizons, and hold U.S. equities benefit most and may be willing to pay around 100 basis points annually to switch from symmetric to asymmetric forecasts. Accounting for asymmetry in both variances and correlations significantly lowers realized portfolio risk.
Description: 23 page(s)
Subject Keyword: 150200 Banking, Finance and Investment
Subject Keyword: portfolio choice
Subject Keyword: investment decisions
Subject Keyword: international financial markets
Subject Keyword: forecasting
Subject Keyword: time-series models
Resource Type: journal article
Organisation: Macquarie University. Dept. of Economics

Identifier: http://hdl.handle.net/1959.14/75085
Identifier: ISSN:1475-6803
Identifier: mq-rm-2007002284
Language: eng
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