Movements and Co-Movements Across European Asset Classes: Portfolio Allocation and Policy Implications

28 Pages Posted: 18 Jan 2013

See all articles by Michael Donadelli

Michael Donadelli

Leibniz Institute for Financial Research SAFE

Lorenzo Prosperi

University of Toulouse 1 - Toulouse School of Economics (TSE)

Federica Romei

Luiss Guido Carli University

Federico Silvestri

Allianz Investment Management Spa

Date Written: November 1, 2012

Abstract

This paper studies the impact of changes in the dynamic of correlation coefficients between asset returns on portfolio choices. Using weekly data from February 2002 to October 2011 on four different European asset classes, we obtain three main results. Firstly, we show that the 2007-2009 global demand collapse and the European sovereign debt crisis have largely affected the dynamic of correlation coefficients between European asset returns. Reductio ad absurdum, we observe that diversification can be implemented intra-class in the post-Lehman world. Secondly, in a dynamic ex-post and ex-ante mean-variance optimization (MVO) framework, we show that “stressed sovereign assets” (e.g. Greek and Italian Government Bonds) are less desirable. Thirdly, in the context of consumption-based asset pricing, we find that the resulting ex-post and ex-ante dynamic allocation reflects the investor’s insurance motive. We conclude by arguing that the resulting allocation might have strong implications for policymakers.

Keywords: time-varying correlation coefficients, mean-variance optimization, sovereign crisis, stressed assets

JEL Classification: C13, G12, G15, E44

Suggested Citation

Donadelli, Michael and Prosperi, Lorenzo and Romei, Federica and Silvestri, Federico, Movements and Co-Movements Across European Asset Classes: Portfolio Allocation and Policy Implications (November 1, 2012). Available at SSRN: https://ssrn.com/abstract=2201855 or http://dx.doi.org/10.2139/ssrn.2201855

Michael Donadelli (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Lorenzo Prosperi

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Federica Romei

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Federico Silvestri

Allianz Investment Management Spa ( email )

Milan
Italy

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