Research on Global Asset Allocation Based on Asymmetric Dynamic Conditional Correlation

Abstract

Abstract: Global asset allocation diversifies the market risks and industry risks as well as idiosyncratic risks. Taking the stock market for example, this paper establishes an approach to select risky assets based on strategies of cross-markets and cross-industries, which provides a new viewpoint for investors to reduce the co-movement risks and achieve the wealth appreciation by global asset allocation. We estimate the asymmetric dynamic conditional correlation between international financial markets and determine a few candidate markets with lower correlation to diversify the market risks by market segmentation. Then some indices are designed to assess the quality of risky assets, which are used to select potential industries (risky assets) from candidate markets to construct the asset pool. Numerical experiments show that the proposed approach of selecting risky assets based on diversified strategies improves the quality of assets pool and performs better risk control than market benchmark. This paper aims to propose a general systematic method for investors to select risky assets and construct high-quality assets pool for global asset allocation.

Key words: dynamic conditional correlation, global asset allocation, diversified strategy, co-movement risks, asset pool

Gong Jianying, Wang Luyi, Ji Xiaodong. Research on Global Asset Allocation Based on Asymmetric Dynamic Conditional Correlation[J]. Management Review, 2021, 33(6): 41-52.

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