IDEAS home Printed from https://ideas.repec.org/p/rim/rimwps/18_14.html
   My bibliography  Save this paper

International portfolio allocation with European fixed-income funds: What scope for Italian funds?

Author

Listed:
  • Paolo Zagaglia

    () (The Rimini Centre for Economic Analysis; Department of Economics (Bologna campus) and School of Political Science (Ravenna campus), Università degli Studi di Bologna)

Abstract

We study optimal asset allocation for a portfolio of European fixed-income mutual funds during the recent financial turmoil. We use a sample of daily returns for country indices of French, German and Italian funds to investigate the quest for international diversification. Our analysis focuses on the specific role of Italian funds. We compute optimal portfolio allocations from a modified mean-variance framework that takes as input the out-of-sample forecasts for the conditional mean, volatility and correlation of the funds returns. VaR forecast comparisons between alternative models provide support for a fractionally-integrated GARCH for the conditional variance. The interaction between the funds is modelled as the Dynamic Conditional Correlation of Engle (2002). Our results are twofold. First, the optimal portfolio allocates more than 50% of assets to German funds, while assigning equal shares of approximately 20% to both French and Italian funds. This strategy generates portfolio returns that are more stable than those of our competing models. It is also characterized by a worsening of the risk-return tradeoff throughout the evaluation period. The second result is that overweighing Italian funds with respect to the optimal strategy causes the portfolio to hold additional volatility of returns without generating compensation for risk.

Suggested Citation

  • Paolo Zagaglia, 2014. "International portfolio allocation with European fixed-income funds: What scope for Italian funds?," Working Paper series 18_14, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:18_14
    as

    Download full text from publisher

    File URL: http://www.rcea.org/RePEc/pdf/wp18_14.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Conrad, Christian & Karanasos, Menelaos & Zeng, Ning, 2011. "Multivariate fractionally integrated APARCH modeling of stock market volatility: A multi-country study," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 147-159, January.
    2. Anolli, Mario & Del Giudice, Alfonso, 2008. "Italian Open End Mutual Fund Costs," MPRA Paper 8111, University Library of Munich, Germany.
    3. Cesari, Riccardo & Panetta, Fabio, 2002. "The performance of Italian equity funds," Journal of Banking & Finance, Elsevier, vol. 26(1), pages 99-126, January.
    4. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
    5. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
    6. 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.
    7. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    8. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rim:rimwps:18_14. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marco Savioli). General contact details of provider: http://edirc.repec.org/data/rcfeait.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.