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Portfolio Allocation under Asymmetric Dependence in Asset Returns using Local Gaussian Correlations

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Listed:
  • Anders D. Sleire
  • B{aa}rd St{o}ve
  • H{aa}kon Otneim
  • Geir Drage Berentsen
  • Dag Tj{o}stheim
  • Sverre Hauso Haugen

Abstract

It is well known that there are asymmetric dependence structures between financial returns. In this paper we use a new nonparametric measure of local dependence, the local Gaussian correlation, to improve portfolio allocation. We extend the classical mean-variance framework, and show that the portfolio optimization is straightforward using our new approach, only relying on a tuning parameter (the bandwidth). The new method is shown to outperform the equally weighted (1/N) portfolio and the classical Markowitz portfolio for monthly asset returns data.

Suggested Citation

  • Anders D. Sleire & B{aa}rd St{o}ve & H{aa}kon Otneim & Geir Drage Berentsen & Dag Tj{o}stheim & Sverre Hauso Haugen, 2021. "Portfolio Allocation under Asymmetric Dependence in Asset Returns using Local Gaussian Correlations," Papers 2106.12425, arXiv.org.
    • Handle: RePEc:arx:papers:2106.12425
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