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Partial information about contagion risk, self-exciting processes and portfolio optimization

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  • Branger, Nicole
  • Kraft, Holger
  • Meinerding, Christoph
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    Abstract

    This paper compares two classes of models that allow for additional channels of correlation between asset returns: regime switching models with jumps and models with contagious jumps. Both classes of models involve a hidden Markov chain that captures good and bad economic states. The distinctive feature of a model with contagious jumps is that large negative returns and unobservable transitions of the economy into a bad state can occur simultaneously. We show that in this framework the filtered loss intensities have dynamics similar to self-exciting processes. Besides, we study the impact of unobservable contagious jumps on optimal portfolio strategies and filtering. --

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    File URL: http://econstor.eu/bitstream/10419/88730/1/775811742.pdf
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    Bibliographic Info

    Paper provided by Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt in its series SAFE Working Paper Series with number 28.

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    Date of creation: 2013
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    Handle: RePEc:zbw:safewp:28

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    Related research

    Keywords: Asset Allocation; Contagion; Nonlinear Filtering; Hidden State; Selfexciting Processes;

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    1. Kole, Erik & Koedijk, Kees & Verbeek, Marno, 2006. "Portfolio implications of systemic crises," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2347-2369, August.
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