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Asset Allocation by Variance Sensitivity Analysis

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  • Simone Manganelli

Abstract

This article provides a solution to the curse of dimensionality associated to multivariate generalized autoregressive conditionally heteroskedastic (GARCH) estimation. We work with univariate portfolio GARCH models and show how the multivariate dimension of the portfolio allocation problem may be recovered from the univariate approach. The main tool we use is "variance sensitivity analysis," the change in the portfolio variance induced by an infinitesimal change in the portfolio allocation. We suggest a computationally feasible method to find minimum variance portfolios and estimate full variance-covariance matrices. An application to real data portfolios implements our methodology and compares its performance against that of selected popular alternatives. Copyright 2004, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jjfinec/nbh015
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Bibliographic Info

Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 2 (2004)
Issue (Month): 3 ()
Pages: 370-389

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Handle: RePEc:oup:jfinec:v:2:y:2004:i:3:p:370-389

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Cited by:
  1. Torben G. Andersen & Tim Bollerslev & Peter F. Christoffersen & Francis X. Diebold, 2005. "Practical Volatility and Correlation Modeling for Financial Market Risk Management," NBER Working Papers 11069, National Bureau of Economic Research, Inc.
  2. Manganelli, Simone, 2006. "A new theory of forecasting," Working Paper Series 0584, European Central Bank.
  3. Syriopoulos, Theodore & Roumpis, Efthimios, 2009. "Dynamic correlations and volatility effects in the Balkan equity markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(4), pages 565-587, October.
  4. Panayiotis F. Diamandis & Anastassios A. Drakos & Georgios P. Kouretas & Leonidas P. Zarangas, 2012. "Asset allocation in the Athens stock exchange: a variance sensitivity analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(2), pages 167-181, 04.
  5. Eli Bouri & Andre Eid & Imad Kachacha, 2014. "The Dynamic Behaviour and Determinants of Linkages among Middle Eastern and North African Stock Exchanges," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 1-22, March.
  6. Bai, Zhidong & Li, Hua & Wong, Wing-Keung, 2013. "The best estimation for high-dimensional Markowitz mean-variance optimization," MPRA Paper 43862, University Library of Munich, Germany.
  7. Manganelli, Simone, 2007. "Asset allocation by penalized least squares," Working Paper Series 0723, European Central Bank.

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