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Portfolio allocation in transition economies

  • ROCKINGER, Michael
  • JONDEAU, Eric

    (ERUDITE, Universite Paris XII Val de Marne)

Designing an investment strategy in transition economies is a difficult task because stock-markets opened through time, time series are short, and there is little guidance how to obtain expected returns and covariance matrices necessary for mean-variance portfolio allocation. Also, structural breaks are likely to occur. We develop an ad-hoc investment strategy with a flavor of Bayesian learning. An observation is that often an extreme event will herald a new state of the economy. We use this observation to re-initialize learning when unlikely returns materialize. By using a Cornell benchmark, we are able to show the usefulness of our strategy for certain types of re-initializations.

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 740.

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Length: 36 pages
Date of creation: 01 Oct 2001
Date of revision:
Handle: RePEc:ebg:heccah:0740
Contact details of provider: Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
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