Cross-region and cross-sector asset allocation with regimes

Paul Y. Dou, David R. Gallagher, David Schneider, Terry S. Walter

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

Cross-region and cross-sector asset allocation decisions are one of the most fundamental issues in international equity portfolio management. Equity returns exhibit higher volatilities and correlations, and lower expected returns, in bear markets compared to bull markets. However, static mean-variance analysis fails to capture this salient feature of equity returns. We accommodate the nonlinearity of returns using a regime switching model across both regions and sectors. The regime-dependent asset allocation potentially adds value to the traditional static mean-variance allocation. In addition, optimal allocation across sectors provide greater benefits compared to international diversification, which is characterized by higher returns, lower risks, lower correlations with the world market and a higher Sharpe ratio.

Original languageEnglish
Pages (from-to)809-846
Number of pages38
JournalAccounting and Finance
Volume54
Issue number3
DOIs
Publication statusPublished - 1 Sep 2014

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    Dou, P. Y., Gallagher, D. R., Schneider, D., & Walter, T. S. (2014). Cross-region and cross-sector asset allocation with regimes. Accounting and Finance, 54(3), 809-846. https://doi.org/10.1111/acfi.12017