International Asset Allocation Under Regime Switching, Skew, and Kurtosis Preferences

Posted: 26 Jun 2008

See all articles by Massimo Guidolin

Massimo Guidolin

Bocconi University, Dept. of Finance; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Allan Timmermann

UCSD ; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2008

Abstract

This paper investigates the international asset allocation effects of time-variations in higher-order moments of stock returns such as skewness and kurtosis. In the context of a four-moment International Capital Asset Pricing Model (ICAPM) specification that relates stock returns in five regions to returns on a global market portfolio and allows for time-varying prices of covariance, co-skewness, and co-kurtosis risk, we find evidence of distinct bull and bear regimes. Ignoring such regimes, an unhedged US investor's optimal portfolio is strongly diversified internationally. The presence of regimes in the return distribution leads to a substantial increase in the investor's optimal holdings of US stocks, as does the introduction of skewness and kurtosis preferences.

Keywords: G12, F30, C32

Suggested Citation

Guidolin, Massimo and Timmermann, Allan, International Asset Allocation Under Regime Switching, Skew, and Kurtosis Preferences (April 2008). The Review of Financial Studies, Vol. 21, Issue 2, pp. 889-935, 2008, Available at SSRN: https://ssrn.com/abstract=1151605 or http://dx.doi.org/hhn006

Massimo Guidolin (Contact Author)

Bocconi University, Dept. of Finance ( email )

Via Roentgen, 1
2nd floor
Milan, MI 20136
Italy

Bocconi University - CAREFIN - Centre for Applied Research in Finance

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Milan, 20136
Italy

Allan Timmermann

UCSD ( email )

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La Jolla, CA 92093-0553
United States
858-534-0894 (Phone)

HOME PAGE: http://rady.ucsd.edu/people/faculty/timmermann/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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