Symmetric versus asymmetric conditional covariance forecasts: Does it pay to switch?

Susan Thorp*, George Milunovich

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

10 Citations (Scopus)


Volatilities and correlations for equity markets rise more after negative returns shocks than after positive shocks. Allowing for these asymmetries in covariance forecasts decreases mean-variance portfolio risk and improves investor welfare. We compute optimal weights for international equity portfolios using predictions from asymmetric covariance forecasting models and a spectrum of expected returns. Investors who are moderately risk averse, have longer rebalancing horizons, and hold U.S. equities benefit most and may be willing to pay around 100 basis points annually to switch from symmetric to asymmetric forecasts. Accounting for asymmetry in both variances and correlations significantly lowers realized portfolio risk.

Original languageEnglish
Pages (from-to)355-377
Number of pages23
JournalJournal of Financial Research
Issue number3
Publication statusPublished - Sept 2007


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