Portfolio Allocation under Asymmetric Dependence in Asset Returns using Local Gaussian Correlations
Portfolio Management
2021-06-24 v1 Applications
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.
Keywords
Cite
@article{arxiv.2106.12425,
title = {Portfolio Allocation under Asymmetric Dependence in Asset Returns using Local Gaussian Correlations},
author = {Anders D. Sleire and Bård Støve and Håkon Otneim and Geir Drage Berentsen and Dag Tjøstheim and Sverre Hauso Haugen},
journal= {arXiv preprint arXiv:2106.12425},
year = {2021}
}