Optimal Diversification within Mixed-Asset Portfolios Using a Conditional Heteroskedasticity Approach: Evidence from the U.S. And the U.K.

Posted: 16 Apr 1999

See all articles by Michael Giliberto

Michael Giliberto

JPMorgan Asset Management

Foort Hamelink

Lombard Odier Asset Management (SA); VU University Amsterdam

Martin Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Aberdeen - Business School

Bryan MacGregor

University of Aberdeen - Centre for Property Research

Abstract

In this article, portfolio allocation strategies based on a threshold autoregressive conditional heteroskedasticity model (QTARCH) are constructed for the United States and the United Kingdom and compared to a conventional asset allocation. Our procedure is based on partitioning the historical data into 'states of the world,' which are used to produce expectations of return and risk. Several approaches are developed to partition an initial in-sample period (1978?1983), using quarterly asset returns and economic data. These partitions are then used to test out-of-sample strategies for the next quarter. Although the conditional results are sensitive to the method of partitioning, we show that the approach can improve portfolio performance in both countries and that most of the performance improvement stems from using conditional variances-covariances.

JEL Classification: G12

Suggested Citation

Giliberto, Michael and Hamelink, Foort and Hoesli, Martin Edward Ralph and MacGregor, Bryan D., Optimal Diversification within Mixed-Asset Portfolios Using a Conditional Heteroskedasticity Approach: Evidence from the U.S. And the U.K.. Available at SSRN: https://ssrn.com/abstract=152970

Michael Giliberto (Contact Author)

JPMorgan Asset Management ( email )

522 Fifth Avenue
New York, NY 10036
United States

Foort Hamelink

Lombard Odier Asset Management (SA) ( email )

6 avenue des Morgines
Petit-Lancy
Geneva, 1213
Switzerland

HOME PAGE: http://www.hamelink.com

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Martin Edward Ralph Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Bryan D. MacGregor

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland
44-1224-272-356 (Phone)
44-1224-273-487 (Fax)

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