Industry Portfolio Allocation with Asymmetric Correlations
European Journal of Finance, Forthcoming
Posted: 7 Nov 2015 Last revised: 13 Apr 2020
Date Written: November 6, 2015
Abstract
In this paper, we derive optimal investment policies at the industry portfolio level under the stochastic investment opportunities of dynamic and asymmetric properties. For this purpose, we present a new model of intertemporal dynamic portfolio choice as well as non-myopic optimal consumption plans under the financial market with a riskless bond, two industry stocks, and a market index. To capture the dynamic and asymmetric correlation effects at the industry portfolio level, we employ a regime-switching type asymmetric effect in which the correlations among two industry portfolios and the market index show the time variation according to the business boom and recession. Based on the numerical experiments, we show that the stochastic nature of conditional correlations, dynamic and asymmetric properties play important roles in determining the portfolio weights than previously thought.
Keywords: Optimal portfolio; Dynamic and asymmetric correlation, Systematic risk
JEL Classification: G11; G12; C61
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