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Asset allocation in the Athens Stock Exchange: A variance sensitivity analysis

  • Panayiotis Diamandis

    (Department of Business Administration, Athens University of Economics and Business)

  • Georgios Kouretas

    ()

    (Department of Economics, University of Crete)

  • Leonidas Zarangas

    (Department of Finance and Auditing, Technological Educational Institute of Epirus)

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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File URL: http://economics.soc.uoc.gr/wpa/docs/AseAlloc.pdf
File Function: First version, 2006
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Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0602.

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Length: 27 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:crt:wpaper:0602
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  1. Nijman, T. & Sentana, E., 1993. "Marginalization and Contemporaneous Aggregation in Multivariate Garch Processes," Papers 9312, Tilburg - Center for Economic Research.
  2. 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 116-31, February.
  3. Manganelli, Simone & Ceci, Vladimiro & Vecchiato, Walter, 2002. "Sensitivity analysis of volatility: a new tool for risk management," Working Paper Series 0194, European Central Bank.
  4. Olivier Ledoit & Pedro Santa Clara & Michael Wolf, 2001. "Flexible multivariate GARCH modeling with an application to international stock markets," Economics Working Papers 578, Department of Economics and Business, Universitat Pompeu Fabra.
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  6. Eschenbach, Felix & Schuknecht, Ludger, 2002. "The fiscal costs of financial instability revisited," Working Paper Series 0191, European Central Bank.
  7. Tim Bollerslev & Jeffrey M. Wooldridge, 1988. "Quasi-Maximum Likelihood Estimation of Dynamic Models with Time-Varying Covariances," Working papers 505, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Gouriéroux, Christian & Laurent, J.P. & Scaillet, Olivier, 1999. "Sensitivity Analysis of Values at Risk," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2000002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Jan 2000.
  9. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  10. repec:cup:etheor:v:11:y:1995:i:1:p:122-50 is not listed on IDEAS
  11. 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.
  12. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
  13. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  14. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
  15. Christian Gourieroux & Jean-Paul Laurent & Olivier Scaillet, 2000. "Sensitivity Analysis of Values at Risk," Working Papers 2000-05, Centre de Recherche en Economie et Statistique.
  16. 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, Reading University.
  17. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  18. Simone Manganelli, 2004. "Asset Allocation by Variance Sensitivity Analysis," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(3), pages 370-389.
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