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Portfolio Diversification and Complementarity in Asset Demand Systems

Author

Listed:
  • Akbas, Ozan E.

    (Warwick Business School, University of Warwick)

  • Wang, Ao

    (Department of Economics, University of Warwick and CAGE Research Centre)

Abstract

Investors evaluate their entire portfolio, not individual assets, striving to balance returns and risks through effective diversification. This paper introduces a flexible demand system accommodating heterogeneous substitution, cross-asset complementarities, and diverse investment strategies. By relaxing multinomial logit assumptions, our model better captures portfolio allocation decisions, linking portfolio weights to both individual asset and portfolio-wide characteristics. We propose a demandinverse approach for the identification of structural parameters. This approach implies a Generalized Method of Moments estimation procedure with novel instruments addressing cross-asset dependencies. Monte Carlo simulations validate the model, demonstrating improved finite-sample properties over standard multinomial logit frameworks. JEL Codes: C51 ; G11 ; G23

Suggested Citation

  • Akbas, Ozan E. & Wang, Ao, 2024. "Portfolio Diversification and Complementarity in Asset Demand Systems," The Warwick Economics Research Paper Series (TWERPS) 1533, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1533
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2024/twerp_1533-_wang.pdf
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    More about this item

    Keywords

    asset demand systems ; flexible substitution ; cross-asset complementarity;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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