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Asymmetric Risk And International Portfolio Choice

This discussion explores the possibility of enhancing investor welfare by incorporating asymmetries in international portfolio choices. The authors propose a strategy that estimates second moments using asymmetric models and predetermined expected returns, finding that moderately risk-averse investors holding US equities may be willing to pay around 100 basis points annually for the switch to asymmetric forecasts. The paper extends previous work on asymmetric volatility and correlation to international assets and measures the economic value added by allowing for these asymmetries.

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Asymmetric Risk And International Portfolio Choice

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  1. Asymmetric Risk And International Portfolio Choice Susan Thorp and George D Milunovich Discussion by Stefano Mazzotta Kennesaw State University

  2. Second moment asymmetry • Volatilities and correlations for equity markets rise more after negative returns shocks than after positive shocks. • Research question: Is it possible to improve investor welfare taking into account asymmetries? • The authors compute weights for international assets portfolios using predictions from asymmetric models, and predetermined “expected” returns.

  3. Findings Investors who are • Moderately risk averse, • Have longer rebalancing horizons • Hold US equities may be willing to pay around 100 basis points annually to switch from symmetric to asymmetric forecasts.

  4. Risk and Return

  5. Strategy • Estimate the second moment in several steps (DCC family of models). • Test the second moment estimates with an array of possible means in mean variance portfolio setup.

  6. Comments I • What is it that makes international investment different? • 1) Exchange risk • 2) Integration/segmentation None of these has a role in this paper.

  7. Comments II • How do the portfolio weights of the competing model compare? • Can you say anything about the transaction cost under the different specifications?

  8. Contribution • Extend Engle and Colacito (2006) work to international assets. • Implement the Fleming et al. (2001) to measure the economic value added by allowing for asymmetric volatility and correlation.

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