Symmetric Versus Asymmetric Conditional Covariance Forecasts: Does It Pay To Switch?
AbstractVolatilities and correlations for equity markets rise more after negative returns shocks than after positive shocks. Allowing for these asymmetries in covariance forecasts decreases mean-variance portfolio risk and improves investor welfare. We compute optimal weights for international equity portfolios using predictions from asymmetric covariance forecasting models and a spectrum of expected returns. Investors who are moderately risk averse, have longer rebalancing horizons, and hold U.S. equities benefit most and may be willing to pay around 100 basis points annually to switch from symmetric to asymmetric forecasts. Accounting for asymmetry in both variances and correlations significantly lowers realized portfolio risk. 2007 The Southern Finance Association and the Southwestern Finance Association.
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Bibliographic InfoArticle provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.
Volume (Year): 30 (2007)
Issue (Month): 3 ()
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- Adam Clements & Ayesha Scott & Annastiina Silvennoinen, 2013. "On the Benefits of Equicorrelation for Portfolio Allocation," NCER Working Paper Series 99, National Centre for Econometric Research.
- Adam E Clements & Ayesha Scott & Annastiina Silvennoinen, 2012. "Forecasting multivariate volatility in larger dimensions: some practical issues," NCER Working Paper Series 80, National Centre for Econometric Research.
- Annastiina Silvennoinen & Timo Teräsvirta, 2012. "Modelling conditional correlations of asset returns: A smooth transition approach," CREATES Research Papers 2012-09, School of Economics and Management, University of Aarhus.
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