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arXiv · 2106.12425

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

Anders D. Sleire·Bård Støve·Håkon Otneim·Geir Drage Berentsen·Dag Tjøstheim·Sverre Hauso Haugen
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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.

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Anders D. Sleire, Bård Støve, Håkon Otneim, Geir Drage Berentsen, Dag Tjøstheim, Sverre Hauso Haugen. 2021-06-03. Portfolio Allocation under Asymmetric Dependence in Asset Returns using Local Gaussian Correlations. https://arxiv.org/abs/2106.12425

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