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Portfolio selection in a multi-asset, incomplete-market economy

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  • Lian, Yu-Min
  • Chen, Jun-Home

Abstract

In this study, we introduce multivariate compound Poisson jump-diffusion processes for the asset price with capturing both the comovement and the cojump in the oscillating market. Furthermore, we apply the Markowitz's mean-variance method to construct a portfolio and investigate the impacts of the cojump on portfolio selection. Empirical results show that the increasing of cojump intensity would increase the correlation between two assets and result in decreasing the effect of risk diversification through portfolio construction. As a consequence, when the major systematic risk occurs, such as the 2008 global financial crisis, the intensity of cojump would increase.

Suggested Citation

  • Lian, Yu-Min & Chen, Jun-Home, 2019. "Portfolio selection in a multi-asset, incomplete-market economy," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 228-238.
    • Handle: RePEc:eee:quaeco:v:71:y:2019:i:c:p:228-238
    DOI: 10.1016/j.qref.2018.08.006
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    Cited by:

    1. Lian, Yu-Min & Chen, Jun-Home & Liao, Szu-Lang, 2021. "Cojump risks and their impacts on option pricing," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 399-410.
    2. Maciel, Leandro, 2021. "A new approach to portfolio management in the Brazilian equity market: Does assets efficiency level improve performance?," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 38-56.
    3. Masoud Rahiminezhad Galankashi & Farimah Mokhatab Rafiei & Maryam Ghezelbash, 2020. "Portfolio selection: a fuzzy-ANP approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-34, December.

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    More about this item

    Keywords

    Multivariate compound Poisson jump-diffusion process; Cojump; Markowitz’s mean-variance method; Portfolio selection;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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