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Dynamic Autocorrelation and International Portfolio Allocation

Author

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  • Jyri Kinnunen

    (Hanken School of Economics, Finland)

  • Minna Martikainen

    (Hanken School of Economics, Finland)

Abstract

We explore the relevance of dynamic autocorrelation in modeling expected returns and allocating funds between developed and emerging stock markets. Using stock market data for the US and Latin America, we find that autocorrelation in monthly returns vary with conditional volatility, implying some investors implement feedback trading strategies. Dynamic autocorrelation models fit the data considerably better than a conditional version of the zero-beta CAPM, while differences between models with an autoregressive term are modest. Investors can improve their portfolio optimization between developed and emerging stock markets by considering time-varying autocorrelation. The most drastic difference in portfolio performance is not due to allowing autocorrelation to vary over time, but realizing that stock returns are autocorrelated, especially in emerging stock markets.

Suggested Citation

  • Jyri Kinnunen & Minna Martikainen, 2017. "Dynamic Autocorrelation and International Portfolio Allocation," Multinational Finance Journal, Multinational Finance Journal, vol. 21(1), pages 21-48, March.
    • Handle: RePEc:mfj:journl:v:21:y:2017:i:1:p:21-48
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    More about this item

    Keywords

    autocorrelation; volatility; portfolio; international; emerging markets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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