Advanced Search
MyIDEAS: Login

: A Risk Management Approach to Optimal Asset Allocation

Contents:

Author Info

  • Thomas J. Flavin

    ()
    (Economics, National University of Ireland, Maynooth)

  • Michael R. Wickens

    (University of York, UK.)

Registered author(s):

    Abstract

    This paper examines how to improve tactical asset allocation by better risk management instead of concentrating on maximising returns. This is achieved by using forecasts of the time- varying conditional covariance matrix of returns obtained from a new specification of the multivariate GARCH process that is particularly well suited to modelling asset returns due to its generality, parameter parsimony and relative ease of estimation. We show that for a portfolio of four UK assets over the period 1976-1997 it would be possible to reduce portfolio risk by on average 5% compared with using the constant sample covariance matrix.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://economics.nuim.ie/sites/economics.nuim.ie/files/working-papers/N841298.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n851298.

    as in new window
    Length: 30 pages
    Date of creation: Dec 1998
    Date of revision:
    Handle: RePEc:may:mayecw:n851298

    Contact details of provider:
    Postal: Maynooth, Co. Kildare
    Phone: 353-1-7083728
    Fax: 353-1-7083934
    Web page: http://economics.nuim.ie
    More information through EDIRC

    Related research

    Keywords: Risk management; asset allocation; GARCH;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-78, July.
    2. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
    3. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    4. Thomas J. Flavin & Michael R. Wickens, 2000. "Global Asset Allocation with Time-varying Risk," Economics, Finance and Accounting Department Working Paper Series n1020800, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    5. Cumby, Robert & Figlewski, Stephen & Hasbrouck, Joel, 1994. "International asset allocation with time varying risk: an analysis and implementation," Japan and the World Economy, Elsevier, vol. 6(1), pages 1-25.
    6. Bollerslev, Tim & Engle, Robert F. & Nelson, Daniel B., 1986. "Arch models," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 49, pages 2959-3038 Elsevier.
    7. Andrew Clare & Raymond O'Brien & Stephen Thomas & Michael Wickens, . "Macroeconomic Shocks and the Domestic CAPM: Evidence from the UK Stock Market," Discussion Papers 94/10, Department of Economics, University of York.
    8. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, vol. 60(4), pages 668-75, September.
    9. Thomas J. Flavin & Michael R. Wickens, 2001. "A Risk Management Approach to Optimal Asset Allocation," Economics, Finance and Accounting Department Working Paper Series n1080301, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    10. Karen K. Lewis, 1998. "International Home Bias in International Finance and Business Cycles," NBER Working Papers 6351, National Bureau of Economic Research, Inc.
    11. Cooper, Ian & Kaplanis, Evi, 1994. "Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 45-60.
    12. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
    13. repec:cup:etheor:v:11:y:1995:i:1:p:122-50 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

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

    Cited by:
    1. Smith, Peter N & Wickens, Michael R, 2002. "Macroeconomic Sources of FOREX Risk," CEPR Discussion Papers 3148, C.E.P.R. Discussion Papers.
    2. Thomas J. Flavin & Michael R. Wickens, 2001. "A Risk Management Approach to Optimal Asset Allocation," Economics, Finance and Accounting Department Working Paper Series n1080301, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    3. Thomas J. Flavin & Michael R. Wickens, 1998. "Optimal International Asset Allocation and Home Bias," Economics, Finance and Accounting Department Working Paper Series n841298, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    4. Thomas J. Flavin & Michele G. Limosani, 2000. "Explaining European Short-term Interest Rate Differentials: An Application of Tobin's Portfolio Theory," Economics, Finance and Accounting Department Working Paper Series n1000500, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    5. Thomas J. Flavin & Michael R. Wickens, 2000. "Global Asset Allocation with Time-varying Risk," Economics, Finance and Accounting Department Working Paper Series n1020800, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    6. Flavin, T. J. & Wickens, M. R., 2003. "Macroeconomic influences on optimal asset allocation," Review of Financial Economics, Elsevier, vol. 12(2), pages 207-231.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:may:mayecw:n851298. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    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.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 profile, as there may be some citations waiting for confirmation.

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