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Portfolio allocation in transition economies

Author

Listed:
  • Michael Rockinger

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Eric Jondeau

Abstract

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.

Suggested Citation

  • Michael Rockinger & Eric Jondeau, 2001. "Portfolio allocation in transition economies," Working Papers hal-00601482, HAL.
    • Handle: RePEc:hal:wpaper:hal-00601482
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    Keywords

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F30 - International Economics - - International Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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