Asymmetric Excitation and the US Bias in Portfolio Choice

72 Pages Posted: 25 Nov 2019

See all articles by Zhenzhen Fan

Zhenzhen Fan

Nankai University - School of Finance

Roger J. A. Laeven

University of Amsterdam - Department of Quantitative Economics (KE)

Rob van den Goorbergh

APG Asset Management

Date Written: August 23, 2018

Abstract

We analyse a global equity return model driven by mutually exciting jump-diffusions with asymmetric excitation to account for the fact that crashes in the US get reflected quickly in other economies but much less the other way round. We solve in closed-form the associated portfolio optimization problem and find that the optimal portfolio is biased towards the US compared to classic models. By calibrating the model to historical returns on the US, Japanese, and European equity indices, we show that the over-exposure to the US equity predicted by our model is consistent with the cross-border equity portfolios observed in reality.

Keywords: Portfolio choice; the US bias; International diversification; Asymmetric excitation; Mutually exciting jumps.

JEL Classification: G11, G15

Suggested Citation

Fan, Zhenzhen and Laeven, Roger Jean Auguste and van den Goorbergh, Rob, Asymmetric Excitation and the US Bias in Portfolio Choice (August 23, 2018). Available at SSRN: https://ssrn.com/abstract=3485356 or http://dx.doi.org/10.2139/ssrn.3485356

Zhenzhen Fan (Contact Author)

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

Roger Jean Auguste Laeven

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Valckenierstraat 65-67
Amsterdam, 1018 XE
Netherlands
+31 20 525 4252 (Phone)

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

Rob Van den Goorbergh

APG Asset Management ( email )

P.O. Box 75283
1070 AG Amsterdam
Netherlands

HOME PAGE: http://www.apg.nl/apgsite/pages/english/

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