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Asset allocation in the Athens stock exchange: a variance sensitivity analysis

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  • Panayiotis F. Diamandis
  • Anastassios A. Drakos
  • Georgios P. Kouretas
  • Leonidas P. Zarangas

Abstract

This paper provides an analysis of asset allocation using univariate portfolio GARCH models from the Athens Stock Exchange. We use daily data for the period January 1997 to February 2005. Our analysis adopts the methodology due to Manganelli (2004) and we are able to recover from the univariate approach the multivariate dimension of the portfolio allocation problem. Manganelli (2004) suggests that such a dual problem can be solved with the application of a variance sensitivity analysis which considers the change in the portfolio variance induced by an infinitesimal change in the portfolio allocation. Our main findings are based on the estimation of the variance sensitivity for a portfolio of two assets and the way sensitivity has been changing over time and this has implications for risk management. In addition we compute the second derivative of the estimated variance with respect to portfolio weights and this gives an indication of the benefits arising from diversification at any given point of time.
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Suggested Citation

  • 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, April.
    • Handle: RePEc:wly:ijfiec:v:17:y:2012:i:2:p:167-181
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    References listed on IDEAS

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    1. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    2. Nijman, Theo & Sentana, Enrique, 1996. "Marginalization and contemporaneous aggregation in multivariate GARCH processes," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 71-87.
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    5. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
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    7. Carol Alexander, 2000. "Orthogonal Methods for Generating Large Positive Semi-Definite Covariance Matrices," ICMA Centre Discussion Papers in Finance icma-dp2000-06, Henley Business School, University of Reading.
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    10. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
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    Cited by:

    1. Vortelinos, Dimitrios I., 2015. "The Greek equity market in European equity portfolios," Economic Modelling, Elsevier, vol. 49(C), pages 144-153.

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    More about this item

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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