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: A Risk Management Approach to Optimal Asset Allocation

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  • Thomas J. Flavin

    (Economics, National University of Ireland, Maynooth)

  • Michael R. Wickens

    (University of York, UK.)

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.

Suggested Citation

  • Thomas J. Flavin & Michael R. Wickens, 1998. ": A Risk Management Approach to Optimal Asset Allocation," Economics Department Working Paper Series n851298, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n851298
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    Cited by:

    1. T.J. Flavin & M.R. Wickens, 2003. "Macroeconomic influences on optimal asset allocation," Review of Financial Economics, John Wiley & Sons, vol. 12(2), pages 207-231.
    2. Peter Smith & Michael Wickens, 2002. "Asset Pricing with Observable Stochastic Discount Factors," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 397-446, July.
    3. Thomas J. Flavin & Michele G. Limosani, 2000. "Explaining European Short-term Interest Rate Differentials: An Application of Tobin's Portfolio Theory," Economics Department Working Paper Series n1000500, Department of Economics, National University of Ireland - Maynooth.
    4. Thomas J. Flavin & Michael R. Wickens, 1998. "Optimal International Asset Allocation and Home Bias," Economics Department Working Paper Series n841298, Department of Economics, National University of Ireland - Maynooth.
    5. Thomas J. Flavin & Michael R. Wickens, 1998. ": A Risk Management Approach to Optimal Asset Allocation," Economics Department Working Paper Series n851298, Department of Economics, National University of Ireland - Maynooth.
    6. Andrew Clark, 2005. "The use of Hurst and effective return in investing," Quantitative Finance, Taylor & Francis Journals, vol. 5(1), pages 1-8.
    7. Thomas J. Flavin & Michael R. Wickens, 2006. "Optimal International Asset Allocation With Time‐Varying Risk," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(5), pages 543-564, November.
    8. Hiona Balfoussia & Mike Wickens, 2007. "Macroeconomic Sources of Risk in the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 205-236, February.
    9. Thomas J. Flavin & Michael R. Wickens, 2000. "Global Asset Allocation with Time-varying Risk," Economics Department Working Paper Series n1020800, Department of Economics, National University of Ireland - Maynooth.

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    More about this item

    Keywords

    Risk management; asset allocation; GARCH;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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