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: A Risk Management Approach to Optimal Asset Allocation

  • Thomas J. Flavin

    ()

    (Economics, National University of Ireland, Maynooth)

  • Michael R. Wickens

    (University of York, UK.)

This paper examines how to improve tactical asset allocation by better risk management instead of concentrating on maximising returns. This is achieved by using forecasts of the time- varying conditional covariance matrix of returns obtained from a new specification of the multivariate GARCH process that is particularly well suited to modelling asset returns due to its generality, parameter parsimony and relative ease of estimation. We show that for a portfolio of four UK assets over the period 1976-1997 it would be possible to reduce portfolio risk by on average 5% compared with using the constant sample covariance matrix.

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File URL: http://repec.maynoothuniversity.ie/mayecw-files/N841298.pdf
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Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n851298.

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Length: 30 pages
Date of creation: Dec 1998
Date of revision:
Handle: RePEc:may:mayecw:n851298
Contact details of provider: Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting
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  22. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
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  25. Thomas J. Flavin & Michael R. Wickens, 2001. "A Risk Management Approach to Optimal Asset Allocation," Economics, Finance and Accounting Department Working Paper Series n1080301, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  26. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
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  32. Tzavalis, Elias & Wickens, Michael R, 1997. "Explaining the Failures of the Term Spread Models of the Rational Expectations Hypothesis of the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 364-80, August.
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