IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v43y1997i7p998-1016.html
   My bibliography  Save this article

A Dynamic, Globally Diversified, Index Neutral Synthetic Asset Allocation Strategy

Author

Listed:
  • Frederick Novomestky

    (Management Department, Polytechnic University, Brooklyn, New York 11201)

Abstract

An investor with the ability to assess the prospective return and risk structure of the global capital markets can construct portfolios that, over time, will not only outperform actively or passively managed domestic asset portfolios but will also outperform passively managed global portfolios. A Bayesian approach to dynamic seemingly unrelated regression (DSUR) is a robust and effective means to forecast the one-step ahead, conditional distribution of asset returns. This approach recognizes the time-varying nature of the global capital markets. The predictive moments are used to derive a single-factor return model once an index portfolio is specified. The index portfolio represents an investor's underlying portfolio. Given the factor model that assesses the relative attractiveness and risk of the assets in relation to the index, an index neutral portfolio is constructed as an overlay to enhance the returns of the index portfolio. This portfolio is mean-variance optimal, is notional neutral (i.e., the sum of the asset exposures is zero), and has returns that are designed to be uncorrelated with the returns of the index portfolio. The implementation of such an index neutral portfolio using derivative securities is simulated over the period January 1988 to December 1993.

Suggested Citation

  • Frederick Novomestky, 1997. "A Dynamic, Globally Diversified, Index Neutral Synthetic Asset Allocation Strategy," Management Science, INFORMS, vol. 43(7), pages 998-1016, July.
  • Handle: RePEc:inm:ormnsc:v:43:y:1997:i:7:p:998-1016
    DOI: 10.1287/mnsc.43.7.998
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.43.7.998
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mnsc.43.7.998?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Paul Chiou & Cheng-Few Lee, 2013. "Do investors still benefit from culturally home-biased diversification? An empirical study of China, Hong Kong, and Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 40(2), pages 341-381, February.
    2. Chiou, Wan-Jiun Paul, 2008. "Who benefits more from international diversification?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 466-482, December.
    3. Wan- Jiun Paul Chiou & Chun- Pin Hsu & Chin- Wen Huang, 2013. "Development and international diversification benefits of equity markets in China, Hong Kong, and Taiwan," Chapters, in: Peter C.Y. Chow (ed.), Economic Integration Across the Taiwan Strait, chapter 5, pages 102-138, Edward Elgar Publishing.
    4. Chiou, Wan-Jiun Paul & Lee, Alice C. & Chang, Chiu-Chi A., 2009. "Do investors still benefit from international diversification with investment constraints?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 448-483, May.
    5. Chiou, Wan-Jiun Paul, 2009. "Benefits of international diversification with investment constraints: An over-time perspective," Journal of Multinational Financial Management, Elsevier, vol. 19(2), pages 93-110, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:43:y:1997:i:7:p:998-1016. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.