Asset Classes and Portfolio Diversification: Evidence from a Stochastic Spanning Approach

55 Pages Posted: 5 Nov 2020 Last revised: 30 Dec 2020

See all articles by Duc Khuong Nguyen

Duc Khuong Nguyen

EMLV Business School Paris

Nikolas Topaloglou

Athens University of Economics and Business

Thomas Walther

Utrecht University - School of Economics; Dresden University of Technology - Faculty of Economics and Business Management

Date Written: December 29, 2020

Abstract

We propose a stochastic spanning approach to assess whether a traditional portfolio of stocks and bonds spans augmented portfolios including commodities, foreign exchange, and real estate. We empirically show that in all seven portfolio combinations, the augmented portfolio is not spanned by the traditional one. Our results are further confirmed by both parametric and non-parametric tests in an out-of-sample setting. Therefore, traditional investors can generally benefit in terms of higher Sharpe ratios from augmenting their portfolio with alternative asset classes. Additional analysis demonstrates that diversification benefits can be explained by the current state of the U.S. economy and stock markets.

Keywords: Stochastic Dominance, Stochastic Spanning, Commodities, FX, Real Estate, Diversification

JEL Classification: C1, C4, C6, E32, G10, G11, G12, G15

Suggested Citation

Nguyen, Duc Khuong and Topaloglou, Nikolas and Walther, Thomas, Asset Classes and Portfolio Diversification: Evidence from a Stochastic Spanning Approach (December 29, 2020). Available at SSRN: https://ssrn.com/abstract=3721907 or http://dx.doi.org/10.2139/ssrn.3721907

Duc Khuong Nguyen (Contact Author)

EMLV Business School Paris ( email )

12, avenue Léonard de Vinci
Courbevoie, lle de France 92400
France

Nikolas Topaloglou

Athens University of Economics and Business ( email )

76, Patision street
Athens, GR10434
Greece

Thomas Walther

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

HOME PAGE: http://www.thomas-walther.info

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

HOME PAGE: http://www.tu-dresden.de/wiwi/finance

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