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Global Asset Allocation with Time-varying Risk

Author

Listed:
  • Thomas J. Flavin

    (Economics, National University of Ireland, Maynooth)

  • Michael R. Wickens

    (Economics, University of York, UK.)

Abstract

We extend the number of assets available to a UK investor who wishes to select a portfolio of international financial assets. A two-stage allocation strategy is adopted by first forming time-varying portfolios of international government bonds and European equity, both of which constitute a single asset in the final asset allocation procedure. We find that extending the investment opportunity set presents substantial risk-return advantages to the investor, together with better performing portfolios. Finally, we show that the level of home country bias prevalent in the UK is quite large. Our results show that, on average, home assets constitute only 57% of the optimal portfolio, while survey results suggest the actual proportion of home assets held by UK investors is 82%. We find that on average six foreign assets should be held in the optimal portfolio with US, French and German equity all having a major role to play.

Suggested Citation

  • Thomas J. Flavin & Michael R. Wickens, 2000. "Global Asset Allocation with Time-varying Risk," Economics Department Working Paper Series n1020800, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n1020800
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    References listed on IDEAS

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    6. Thomas J. Flavin & Michael R. Wickens, 1998. ": A Risk Management Approach to Optimal Asset Allocation," Economics Department Working Paper Series n851298, Department of Economics, National University of Ireland - Maynooth.
    7. Cumby, Robert & Figlewski, Stephen & Hasbrouck, Joel, 1994. "International asset allocation with time varying risk: an analysis and implementation," Japan and the World Economy, Elsevier, vol. 6(1), pages 1-25.
    8. Thomas J. Flavin & Michael R. Wickens, 1998. "Optimal International Asset Allocation and Home Bias," Economics Department Working Paper Series n841298, Department of Economics, National University of Ireland - Maynooth.
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    Cited by:

    1. Thomas J. Flavin & Michael R. Wickens, 1998. "Optimal International Asset Allocation and Home Bias," Economics Department Working Paper Series n841298, Department of Economics, National University of Ireland - Maynooth.
    2. Thomas J. Flavin & Michael R. Wickens, 1998. ": A Risk Management Approach to Optimal Asset Allocation," Economics Department Working Paper Series n851298, Department of Economics, National University of Ireland - Maynooth.
    3. Andrew Clark, 2005. "The use of Hurst and effective return in investing," Quantitative Finance, Taylor & Francis Journals, vol. 5(1), pages 1-8.

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    More about this item

    Keywords

    Asset allocation; international diversification; M-GARCH;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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