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Systemic Risk and International Portfolio Choice

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Author Info
SANJIV RANJAN DAS
RAMAN UPPAL
Abstract

Returns on international equities are characterized by jumps; moreover, these jumps tend to occur at the same time across countries leading to "systemic risk". We capture these stylized facts using a multivariate system of jump-diffusion processes where the arrival of jumps is simultaneous across assets. We then determine an investor's optimal portfolio for this model of returns. Systemic risk has two effects: One, it reduces the gains from diversification and two, it penalizes investors for holding levered positions. We find that the loss resulting from diminished diversification is small, while that from holding very highly levered positions is large. Copyright 2004 by The American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 59 (2004)
Issue (Month): 6 (December)
Pages: 2809-2834
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Handle: RePEc:bla:jfinan:v:59:y:2004:i:6:p:2809-2834

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  1. Massimo Guidolin & Stuart Hyde, 2008. "Equity portfolio diversification under time-varying predictability and comovements: evidence from Ireland, the US, and the UK," Working Papers 2008-005, Federal Reserve Bank of St. Louis. [Downloadable!]
  2. Massimo Guidolin & Giovanna Nicodano, 2009. "Small caps in international equity portfolios: the effects of variance risk," Annals of Finance, Springer, vol. 5(1), pages 15-48, January. [Downloadable!] (restricted)
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  3. Carlos Viana de Carvalho & Kevin Amonlirdviman, 2004. "Myopic Loss Aversion, Asymmetric Correlations, and the Home Bias," Econometric Society 2004 Latin American Meetings 61, Econometric Society. [Downloadable!]
  4. Lieven Baele & Koen Inghelbrecht, 2005. "Structural versus Temporary Drivers of Country and Industry Risk," International Finance 0511005, EconWPA. [Downloadable!]
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  5. Alessandro Bucciol & Raffaele Miniaci, 2006. "Optimal asset allocation based on utility maximization in the presence of market frictions," "Marco Fanno" Working Papers 0012, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
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  6. Chollete, Lorán & Heinen, Andréas & Valdesogo, Alfonso, 2008. "Modeling International Financial Returns with a Multivariate Regime Switching Copula," Discussion Papers 2008/3, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
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  7. Massimo Guidolin & Allan Timmerman, 2006. "International asset allocation under regime switching, skew and kurtosis preferences," Working Papers 2005-034, Federal Reserve Bank of St. Louis. [Downloadable!]
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  8. Fulvio Corsi & Davide Pirino & Roberto Renò, 2008. "Volatility forecasting: the jumps do matter," Department of Economics University of Siena 534, Department of Economics, University of Siena. [Downloadable!]
  9. Ahoniemi, Katja & Lanne, Markku, 2007. "Joint Modeling of Call and Put Implied Volatility," MPRA Paper 6318, University Library of Munich, Germany. [Downloadable!]
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  10. Hartmann, Daniel & Kempa, Bernd & Pierdzioch, Christian, 2006. "Economic and Financial Crises and the Predictability of U.S. Stock Returns," MPRA Paper 561, University Library of Munich, Germany, revised Apr 2007. [Downloadable!]
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  11. Susan Thorp & George Milunovich, 2005. "Asymmetric Risk and International Portfolio Choice," Research Paper Series 160, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  12. Jakša Cvitanić & Vassilis Polimenis & Fernando Zapatero, 2008. "Optimal portfolio allocation with higher moments," Annals of Finance, Springer, vol. 4(1), pages 1-28, January. [Downloadable!] (restricted)
  13. Fulvio Corsi & Davide Pirino & Roberto Reno, 2009. "Volatility Forecasting: The Jumps Do Matter," Global COE Hi-Stat Discussion Paper Series gd08-036, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  14. Kole, H.J.W.G. & Koedijk, C.G. & Verbeek, M.J.C.M., 2004. "The effects of systemic crises when investors can be crisis ignorant," Research Paper ERS-2004-027-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  15. Massimo Guidolin & Giovanna Nicodano, 2007. "Managing international portfolios with small capitalization stocks," Working Papers 2007-030, Federal Reserve Bank of St. Louis. [Downloadable!]
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