Spillovers and Asset Allocation

Abstract

This paper demonstrates that spillovers are fully embedded in estimates of expected returns, variances and correlations and that identification of spillovers is not necessary for asset allocation. Simulations of typical empirical spillover settings and empirical estimations further show that same-frequency spillovers are often negligible and spurious.

Keywords: spillover, return spillovers, volatility spillovers, portfolio optimization, asset allocation

JEL Classification: C32, C58, G11